In this episode:
In this episode we go through a real life example of how spinning cash can solve any businesses problem with working capital. It’s not so much increasing your turnover that solves the working capital problem, instead it’s about making sure your working capital cycle works properly for your business. If you can make you money cycle spin faster, hopefully money will move more into your bank than out.
Riann Umaga-Marshall: Hi I’m Riann Umaga-Marshall
Hamish Mexted: And I’m Hamish Mexted
Riann Umaga-Marshall: And welcome to Business Made Easy. In today’s podcast we are covering cash flow and spinning your cash faster.
Hamish Mexted: So what we’re working through is a real life example of how spinning cash can solve any businesses problem with working capital. It’s not so much increasing your turnover that solves the working capital problem, instead it’s about making sure your working capital cycle works properly for your business.
Riann Umaga-Marshall: So recently we have the customer map out their working capital cycle. Obviously we’re not going to disclose who they are, but they’ve given us permission to talk about them generically.
Hamish Mexted: So what we worked out with them to begin with is that it took them five days to close an initial sale. So, from initial meeting to the customer saying yes, took five days. It then took them twelve days for them to begin the job itself. So, we’ve waited 5 days for them to say yes, and then it’s taken us twelve days to get going.
Now, that twelve days feels like a long time but they had to get through their existing backlog of jobs first and they had to get all the parts and the bits and pieces that they needed to do the job itself. They then spend a couple of days doing the work and then the job is done, customer’s got it, and everyone’s happy.
The problem though is that it then took them three days to invoice the customer. So to go back, five days to get the yes from the customer to go ahead. Twelve days for them to do the job and to get everything they needed and then three days before they got the invoice out the door.
So all up it’s been fifteen days for them to issue the invoice to the customer. Once that invoice gets issued the customer then has to decide to pay us and for this customer it was taking about forty days for them, on average, to get paid by their customers. So you take the fifteen days to get the invoice out the door, you take the forty days then to get paid, and all up they’re waiting sixty days for their money.
So as the money cycles through their business they’re typically only going to get through six cycles per year, or six money go rounds before you get to the 365 days in a year. And fundamentally that’s the cash flow problem that every business grapples with, one way or another.
Riann Umaga-Marshall: So in doing the analysis up front we’re able to get some good data around where things were getting stuck in their process. Or where they could make changes and we could help them with that. So we worked on first, making it one day quicker to close the sale, four days quicker to do the job, and then five days quicker to get paid. And permitting different things along the way. So it’s not rocket science. You just need to make some small changes. These things could be from offering payment up front, changing sales scripts to be more assertive, or introducing new process docs internally to do the job quicker.
Hamish Mexted: So with this customer what we’ve seen is their cash now spinning in the cycle 7.5 times a year, compared to the six times a year previously. Now, to reiterate these are only small micro-changes that they’re making across a whole bunch of different areas in their business. But it’s these small changes that has significant impact on cash flow, rather than just focusing on the amount of time it takes the debtor to pay.
So, in broad numbers this increase in spinning, or the increase in times that money goes through a business, increases their gross profit by 25 percent, because everything is moving quicker. They’ve then got more choice in terms of where their money goes, whether they take it out as dividends for the shareholders or whether they pay down debt. But the business owner has 25 percent more cash with which to make a decision on reinvesting back in their business.
Ultimately reducing the cycle time comes down to measurement, because if we don’t have the data, we don’t know where we’re missing. And then accountability back to that data, so the measurement creates a framework for people to be held accountable to. And that accountability creates a better framework for people to build their businesses within.
Now this is all a little bit numbers heavy, forgive us we are accountants at the end of the day, so for more detail check out our website, convexhub.co.nz then go to podcast number three. There you can download a graphic setting all of this out and it will let you run the numbers for your business and your particular situation.
Riann Umaga-Marshall: That’s all we’ve got time for today so let us know if there’s anything you’d like us to run through in upcoming episodes. Next time we’ll be covering some specific and actionable steps to get your money in from your debtors faster. Thanks for tuning in!