Four Decisions for Growth â€“ Part Four
By: Dave Baney
In business, â€œGazellesâ€ are growth firms, they are job generators that will do the most to get our national economy back on track and the leaders of these growth firms continue to grow their businesses despite uncertain times. Gazelles by definition are those organizations that grow by 20% or more each year for at least 5 years in a row. In order to be a gazelle, you must get these four decisions right: people, strategy, execution & cash. At any given time the challenges in one of these four areas may over shadow the rest, therefore youâ€™re looking to choose which one of the four to focus on next.
This week we will talk aboutâ€¦
CASH: Cash is the oxygen that allows the company to run. Its flow allows for choices and without a steady stream of cash the company will gasp and fail. You can survive a long time without profit but you cannot survive a day without cash and it is cash reserve that makes for expansion and growth.
One of the most important things to understand is â€œGrowth sucks cashâ€. Rapid growth causes many companies to run through cash at a rate faster then they generate it. One of the things I encourage companies to do is calculate their cash conversion cycle, which measures how long it takes between the time you spend the first dollar, whether itâ€™s on marketing, design, or buying products until you get that dollar back from the sale of the finished goods.
In the early days of Dell Computers their cash conversion cycle was running 63 days. In other words from the time they first spent a dollar to make your computer until the time they sold that computer to you was about 63 days. And Dell focused on decreasing that cash conversion cycle. Today theyâ€™re running -35 days. Yes thatâ€™s not a typo, it does say -35 days. In other words they get your money 35 days before they start spending money making your computer.
How do they do that? Well, they get paid up front and then of course they order products to start making your computer and your equipment and by the time they pay their vendors, itâ€™s 35 days since theyâ€™ve had your money on hand.
Now imagine a dramatic change from +63 days to -35 days. What would that do for your cash flow? I doubt that most companies can see that dramatic of a swing but it is possible and certainly a dramatic improvement of some sort whether itâ€™s from a +40 days to a +10 daysâ€¦hey 30 days of cash flow is a lot of money in your pocket that youâ€™re not hitting a line of credit or hitting other sources to be able to meet the payroll to continue to operate the business.
You can survive a long time without profit but you cannot survive a day without cash, so take a look at your cash conversion cycle. Take a look at how you generate cash and where you spend it and the timing of it.
Thereâ€™s a great Harvard business review article by Neil Churchill the article is entitled â€œHowfast can your company afford to growâ€. It will give you some good insight into whatâ€™s the cash conversion cycle really all about and help you calculate your own cash conversion cycle.
Frankly everything in your business depends on cash. It yields options that nothing else can. When taken individually, each of the principles: people, strategy, execution and cash, are good business practices. A focus on any one of them will create a tighter more harmonious business. Together they interlock to create a business poised for growth and sustainability no matter what is going on in the economy.
I hope in the process of reviewing these four decisions over the past few weeks youâ€™ve found some things you can do to make your business grow faster, grow more effectively, generate more cash and make you more happy.
Dave Baney brings over 30 years of Fortune 500 management and leadership experience to growing businesses nationwide through 55 Questions’ tools and processes. Known for crisp execution, marketing insight and thoughtful direction, he is now a trusted advisor for CEOs. Contact Dave directly: firstname.lastname@example.org