As a Coach that has been certified by the Gazelles organization, I have worked with clients using a method developed by Verne Harnish that is referred to as the “Four Decisions”.
In business, “Gazelles” 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 moment the challenges in one of these four areas may over-shadow the rest, therefore you’re always looking to choose which one of the four to focus on next.
Let’s start by talking about Cash.
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 allows for expansion and growth.
One of the most important things to understand is that “Growth sucks cash”. Rapid growth causes many companies to run through cash at a rate faster than 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 it’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 they’re running -35 days. That’s not a typo, it does say -35 days. 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 by the time they pay their vendors, it’s 35 days since they’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 it’s from a +40 days to a +10 days…hey 30 days of cash flow is a lot of money in your pocket that you’re not using your line of credit or 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.
There’s a great Harvard business review article by Neil Churchill the article is entitled “How fast can your company afford to grow”. It will give you some good insight into what’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 stronger more harmonious business. Together they interlock to create a business poised for growth and sustainability no matter what is going on in the economy.
Dave Baney is the founder and CEO of 55 Questions, LLC. We work with successful top executives with a driving ambition to crush their competition. We help CEOs and Entrepreneurs improve alignment, communication and accountability throughout their organization. www.55Questions.com
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