Podcast Transcript

[00:00:02] G’day everybody, and welcome to this week's Scale Up Podcast. You are talking with just me today. No guest, just me waxing lyrical about cash. Why do we need to spend time thinking about cash loan? Well, that's pretty obvious. The number one priority for you as a business owner is actually survival.

[00:00:39] That might be a bit controversial, but everyone's like, no. It's focused on purpose and it's this, and this is like, that's all great, but if you don't have the cash in the bank, there is no growth. There is no party going on if there's no cash in the bank, and you have to make sure at all times, obviously you can afford to pay wages and suppliers and taxes and fund your growth.

[00:00:56] No cash. No business. And all of us as Founders are going to face some kind of a cash flow crunch at one point or another, but given it's your number one priority, let me ask you how much time you've actually spent learning about how to optimise cash flow, thinking about it, chatting to a CFO or an accountant about how to optimise it.

[00:01:15] In my experience, quite often in the seven figure Founder range. You know, 1 to 10 mil, not enough. So, I'm going to talk today about four principles, um, that I'd want you just mind test I guess I want you to be thinking about. And then seven ways you can improve your cash coming in and seven ways you can slow or reduce your cash going out.

[00:01:33] And if you are somewhere today that you can take notes, I would encourage you to grab a pen because I'm going to give you quite a lot of content of your bullet points if you like today. If you're not, save this episode, take a screenshot. You can also go to the scaleupspodcast.com website. We have the full transcript on there, so if you want to go to there, no worries whatsoever.

[00:01:50] There's lots of golden here today. Lots of detail. Okay, so first, let us talk about a few principles. Some things I want you to be thinking about. Number one, Priority. You need to shorten your cash conversion cycle. And what do I mean by that? I mean you need to reduce the time it takes to spend a dollar to get a customer and then to get that dollar back from your customer when they pay you.

[00:02:10] How do you truncate that time? And yeah, how do you make it shorter, right? Because the faster that happens, the faster you got cash coming into your business. Number two, stop being the bank for your customers. The number of clients that I know, sorry, I don't mean clients, I mean just Founders I know in general, like over a long period of time doing lots of M&A transactions.

[00:02:30] A number of people I know who pay out faster than their clients pay them is crazy. Why are you acting as the bank for your customers? If you are getting paid in 30 days and you are paying everybody else in 14, that does not work. That is not a good, uh, formula for success on the cash side.

[00:02:49] Thirdly, every day, sometimes people haven't really given us enough thought, but every day you can knock off your accounts with all days is a meaningful contribution to your cash balance. So, for example, if you've got a business that does for easy numbers, 3.65 million a year and you can reduce your accounts receivable days.

[00:03:07] The average number of days it takes you from invoice to getting paid by your customers. And let's just say that's 30 days. If you can reduce that to 29 days, your cash at bank just increased by $10,000. If your, you know, average revenue, let's say is $10,000 a day. So, if you can reduce it by seven days, that's $70,000 sitting in your bank account by 14 days is 140 k sitting your bank account. So why should that money be sitting in your customer's account? Purely because of the way that you've thought about when you invoice, how you invoice, how you incentivise it, how easy you making pay it, all that stuff.

Okay. Fourth point here is, and then we'll get into some of the tips for you to optimise your cash flow. Is the cash flow forecasting is not a nice to have if you want to break through from seven to eight figures. And what do I mean by that?

[00:03:51] You need to have a 90-day cash flow forecast. So, call it 12 weeks, right? Roughly. 12 weeks in detail that's updated every single week. So, your accountant or your finance person is updating your cash flow forecast based on the greatest level of visibility you can get into. What money you expect to go in and what, like a detailed one for 90 days, and then it should be extended through to 12 months. So, every week you're actually getting a full 12-month cash flow update, but probably months 4 to 12 might just be reverting back to whatever you've budgeted for, rather than really kind of doing a bottom-up version. But the 90 days should be detailed. And why 90 days? Because that's typically somewhere within 90 days is usually your cash conversion cycle. That's usually how long it's taking for you to spend a dollar to get a customer and get paid by that customer. So, the sort of cycle is within that so you can start to optimise it once you've got a really clear understanding, uh, of the mechanics of it and how it's working.

[00:04:42] So it's not a nice to have, you need to get it happening. If you don't have it happening, get yourself a virtual CFO or an accountant or a management accountant or whoever. Start building one. Okay, so let me talk tips. Again, pretty detailed stuff today. Um, I'm going to give you seven tips on how to improve your cash coming in, and then seven tips on how to slow down or reduce your cash going out. Number one, improving your cash coming in. Pricing. It's pretty rapid improvement. Uplift your price and the amount of money that's coming back into the bank can change pretty quickly. Number two, Upfront Payments. Encourage or require your customers to make some kind of a deposit or pay up front entirely before you start work.

[00:05:20] I know you may have defaulted and normalised to some model where you just assumed that everybody else does it this way, but that doesn't mean you have to do it that way. So, that's an opportunity for you to get some money up front before you start having to spend it. Speed of Delivery.

[00:05:36] If you have to wait until the work starts to get paid, what can you do to bring maybe a small element of that forward or to get started faster so that you can invoice more quickly and you can get paid more quickly? Number four, Incentives. Perhaps consider offering an incentive for early payment. Maybe it's 1 or 2%, but you know, I don't know if you've seen, you know, probably your energy supply does this in a pretty clever way.

[00:05:59] That could actually even be the normal price. So, it's sort of positioned as that you are saving the penalty, if you like. So, here's the price for if you are 3 to 14 days overdue, or 15 to 30 days overdue, or 31 to 60 days overdue. And it increases beyond the normal price so you can position it as a discount. And the other prices as the normal price. Does that make sense? So, you know, if you normally charge $500, then why don't you say the price is $550, but you'll actually get a 10% discount if you pay it on time. Does that make sense? So, you're still building, but you're not actually reducing your price. You're not actually really providing a discount, but you are changing the optics about how it's presented to the customer. Your invoice timing. You know, maybe you've got an opportunity to, let's say you're in a services business to bill everybody on the first of the month for all the services that are expected to be covered by that month and have it due in the middle or not.

[00:06:48] So whether you deliver the service on the 1st of the month or the 30th of the. You know that you're going to be paid in the middle of the month regardless. And that way you've got a quite a rhythm and ability to predict your cashflow when it's coming in and to manage your expenses. Terms.

[00:07:03] This is a huge one. Do not assume, and even if they ask for it, don't assume that people need 30 days to make payment or sometimes even 14 days. Like give them seven days or, yeah, that is actually a negotiation. You do not have to assume just because I say, oh, sorry, we only pay on 30 day terms.

[00:07:20] Well, sometimes you'll accept that, sometimes you won't. But it's like, sorry, we require payment in seven days. Like you don't have to default to what the customer asks for. You don't be scared of you deciding what the terms are that you think are reasonable for you to get paid in.

[00:07:34] Now the last one here is data management. This is such a big gap that I see in businesses that there's no well-structured process in their business for managing bills that are unpaid or bills that are late. So, get a clear process in place, like two days out, automate a reminder to tell your customers there's an invoice coming that's due in two days.

[00:07:56] That will probably massively improve the number of people that pay on time because they're getting a heads up. Oh, that's right, we've got that bill due. Okay, cool. Let's make sure it gets paid. Then if the invoice, you know, have it automate a reminder the day after it's got, the day after it was due. So, check the account, send the overdue notice. Day three. If you haven't been paid by day 3, somebody needs to call a. Don't wait 7 days. Don't wait 14 days. Don't wait 30. Somebody courtesy call a customer, you know, or maybe do it on day 5, but somewhere in day 3 to day 5, you need to be on the phone with the customer because, and if by day seven they haven't paid you, you need to escalate that to the most senior level in that customer's company.

[00:08:34] Set some expectations, agree and immediate plan. You want them to realise that they don't want to have to have this conversation with you every month, and that's part of the reason why you need to be making the phone calls. So, like, oh, these guys are really on top of it. We don't want to be having these phone calls every month, so let's make sure that we pay them on time.

[00:08:48] It's incredible. It's just the squeaky wheel, right? Like if I'm the CEO and I know that, if we don't pay that bill on time, I'm going to get a phone call, you know, on day 3, then I'm going to make sure my finance person pays that bill on time. You know what I mean? So, sometimes you need to be the squeaky wheel there.

[00:09:05] Okay? There are a few ideas for bringing some more cash in or bringing cash in faster. Here's seven ideas for you to reduce or slow your cash going. Creditor terms. So, this is the opposite of the one I said before. You can say, well, sorry, we only pay on 30 days. Now I know I said that you should challenge your customers on that, but you can also decide that for your own suppliers.

[00:09:28] You say, hey, we want to be paid in seven days. You say, sorry guys, we only pay on 30 days. Why should they get paid faster than you do? Especially if you are getting paid in 30 days and then someone's asking you to pay them in 14 days, your cash flow is backwards. So, I guess my recommendation there is to say you can push your creditor terms in terms of how long it'll take you to pay people out and bring forward the amount of time you expect people to pay you in. If you don't do it, if you don't ask the question, nothing's going to happen.

The other thing I would say that just in terms of, you know, kind of creditor terms, is sometimes you end up with like big lumpy bills, like, big lumpy bills that become difficult for you in your cash flow cycle. Don't be afraid of asking for a payment plan if that's appropriate for you.

[00:10:10] Obviously, I'm not suggesting get yourself into debt, you know, push all of your payments out, and I'm not suggesting either to not pay people on time. What I'm suggesting is always pay people on time based on what you've agreed to do, but think more deeply about what you've actually agreed to rather than just accepting whatever they ask you for.

[00:10:27] Okay. Second way of, and this is, you know, it's linked, but it's scheduling your pay runs. So, for example, if you say to the client, well, look, we only do Accounts payable twice a month, and then it's 30 days from when we do that account' payable. Then basically they have to wait for the next sort of pay run, if you like to get paid.

[00:10:46] So it might be, you know, if it was the first of the month and you say that we do our pay runs in the middle of the month and then it's 30 days. So we essentially process all the invoices we've received in the middle of the month and 30 days later, they all get paid. You may actually be 45 days before that customer gets paid.

[00:11:00] Now they may not love it, but they may also accept it. So again, having like a, just twice a month, you know, we don't do anything with the invoices that come in between day zero and day 13, or day 15 and day 30. We do it in the middle of the month. We do it at the end of the month, and that's when people get paid. And so, it can give you another mechanism in which to sort of push payments out. But again, not in such a way where you are missing payments just so that you're managing expectations. Third is Expense. Take the opportunity to build a zero-based budget. You know, rebuild your budget from the bottom up.

[00:11:33] Rebuild every line. Question every line. Start with the largest costs and work your way down. Do we have the right supplier pricing here? Are we using the right suppliers? Do we still need this thing? Can we do with less of it? If you don't analyse your profitability is built from the bottom of the business up.

[00:11:48] As Brian Will said in a recent podcast with me, was a great commentary, don't just assume why we just need to generate more revenue and keep our costs the same. Challenge your costs every year. Take the opportunity to rebuild the budget from the bottom up and question every line that is in your P&L. You'd be amazed at how many cost saving opportunities you find, or things that have been normalised over time that you really don't need anymore. Okay, fourth, you can always look if you're looking for ways to, this is about probably slowing down the cash going out.

[00:12:21] If you've got an asset that's underutilised, okay, you can sell it. That'll bring cash into the business. But also, you could consider some kind of a leaseback option where you know you are spreading the payments out on that thing over time, rather than taking an upfront hip on cash flow so that that can be something that you can look at.

[00:12:36] Inventory. Now not all of you have inventory, but for the businesses that have got inventory, take the opportunity, like set yourself a leadership rhythm of renegotiating with your key suppliers once a month. I don't mean the same supplier 12 times in the year. I mean, just have a principle. Like what we do is we work from our bigger suppliers to our smaller suppliers, and once a month we do a supplier.

[00:12:59] We take the top one and we renegotiate the terms with that supplier. So that probably, if you've got 12 big suppliers once a year, there's a renegotiation around terms. You know, are you asking for discounts for volume? Like you might be their biggest customer. How do you know? And if you're the biggest customer, they don't want to lose you. And so, you might be able to have some, um, renegotiation power. So, you want to clear, slow moving stock, and you want to renegotiate clear, slow moving stock from an inventory perspective and take the opportunity to renegotiate with your suppliers every month. I don’t know what I'm up to, number six maybe.

[00:13:32] I want you to think about trying to decouple, increasing the amount of variability in your cost of delivery, or cost of service. What do I mean by that? So, you might have, let me give you an example. If you have got a sales and marketing, you've got a third-party agent who is selling for you, somebody else actually sells your product, you give them a percentage of the revenue.

[00:13:59] One of the things I loved about one of the companies I'd partnered with in the early days is, I said; okay, well, we are going to do a third party service for you guys. And we were actually, it wasn't sales and marketing, it was delivery. So, it was an education business. They were going to enrol the students.

[00:14:12] We were going to do the delivery and the, and the backend and the sort of compliance of the business. And then they were going to carry on and do all the support. And I said, okay, well we want this percentage of revenue, and let's just say it was, you know, 15% for argument's sake. And let's say that 15% represented $1,500.

[00:14:29] They said; well, we, we don't want to be 15%, we want to be $1,500. And I was like okay. And they said, because when we increase our prices, we don't want the cost to us of you to go up. So, we want those things to be decoupled. You are saying it's going to cost you $1,500 to deliver the service. Cool, we'll charge us $1,500.

[00:14:48] But what they want it to do, and this is really helpful for you, if you've got anybody who is currently delivering a service or thousand marketing or some element where it's a percentage of your revenue. Then you end up paying them more every time your revenue goes up. See if you can renegotiate some of those to be fixed costs or like actual dollars as opposed to a percentage. So that if you increase your prices, you get the benefit of those price increases. And then, I guess the last one here is just People Costs, for the majority of us, it's the biggest cost we've got. Can we change our staffing mix to better match with demand? You know, for example, if we've got slow periods, how can we think cleverly about those slow periods to find the right balance between contractors and full-timers or casual and full-time or permanent part-time type staff?

[00:15:30] How do we change the staff mix so that when we have revenue drops, we also get a commensurate cost drop rather than we just keep the cost the same, take the revenue hit, and all of a sudden have some awful months every year. It's not easy and there's no perfect science, but, you know, can we essentially get our mix right?

[00:15:46] Second one is, it's kind of a hidden cost from my perspective is if you're not doing an employee engagement survey to really understand what your people want from you, think of you need from you what their issues are, and what you're doing well, then you can't action those. And in the absence of being able to action them, you end up with undesirable turnover because you're not really listening to your people, you're not really fixing problems that are important to them, and you end up with undesirable turnover, which costs you a hell of a lot of money, and recruitment costs can be massive in a business. So that's another way to think about, it's kind of a hidden cost, but actually getting your leadership right because you're getting good insight, through some deeper employee engagement survey, probably once a year with. And finally, if you're in a business that's growing pretty quickly, you're probably doing a lot of recruitment, you need to actually really sit down and think about, um, should I be using an external recruiter or can I actually require, you know, maybe hire an internal recruiter on a contract for a period like a fixed term contract? How would that compare to me having a variable cost? It's nice to have variable cost and recruitment, but sometimes that ends up being a huge amount of money and you might be able to get a contractor who just works with you for nine months on a fixed salary with no incentive plan, no variable cost whatsoever, and actually it could end up being materially cheaper, and you get somebody who's in your business all the time helping you do the recruitment. I've done that before and it can be quite effective.

So, I know that's a lot. I've thrown a whole bunch of things at you. There's 14 different ideas and four principles to help you optimise your cash flow. So, the question to leave you with is what can you do to improve the speed of your incoming cash flow, and slow down or reduce your outgoing cash flow so that you build your cash reserves, giving you more cash to deploy towards growth and to manage your working capital requirements as you go forward? That is the question. I hope that's valuable for you today. Please drop me a note. Let me know if there's something that you really liked out of that.

[00:17:33] Feel free to take a screenshot, send it to somebody else. I'd love to get your feedback. I'd love to you engage on it. Okay? Enjoy. Good luck.