by MHolland | Jan 13, 2021 | Cash Flow
Last week I wrote about the early yardage predictor of cash-flow.
Do you remember? It is the estimated dollar figure of what is in your sales pipeline. And there is the timing aspect. This is the time it takes from connecting with a prospect to closing a sale.
This week we will look at what I call the back-end timing.
Now we look to the future. We look at one grand Key Performance Indicator. It is made up of 3 parts.
Let us take a look at…
What is Your Cash Conversion Cycle?
In a perfect business you have no accounts receivable, no inventory, and you pay your vendors later!
This translates to – you make a sale, and the cash goes into your bank right away.
Imagine you pay your suppliers in 30 days. Wow! Perfect, right? You get the money right away and pay your vendors later.
For most businesses, this is not how it works.
Why not?
Because for most businesses, you have accounts receivable, inventory to sell and accounts payable to pay.
Most businesses have money tied up in accounts receivable (money owed to you). Then there is a lot of cash invested in inventory for others.
The third number is favorable to you – paying your vendors later helps preserve cash!
Let us take a look now at what makes up the calculation of your cash conversion cycle…
Cash Conversion is Made Up of 3 Numbers
Three things make up your cash conversion cycle:
- The days on average it takes to collect your accounts receivable, plus,
- The days on average it takes to sell your inventory
- Less the days on average you take to pay vendors
Let us say it takes you an average of 27 days to collect your accounts receivable (amounts owed to you).
It also takes an average of 18 days to sell your inventory on hand.
You take 21 days to pay your vendors.
Your cash conversion cycle is simply the sum of the first two numbers less the 3rd number.
In this example, you add 27 days to 18 days, and you get 45 days. You subtract 21 days that you take to pay your vendors for the final number of 24 days.
Your cash conversion cycle is 24 days.
This is an estimated number and not a hard number. Each number is an average and it is based on the past.
Anything changes and boom, so does the number.
What Should Your Goal Be?
The trick to improve your cash conversion cycle is to get paid quicker from your customers, sell your stock on hand faster, and pay your vendors a bit more slowly.
Here is an interesting question…
Can you ever have a negative cash conversion cycle?
Yes!
Here, “negative” is great!
For instance, you get paid upfront for most sales, so your Days Receivable is just 3 days. You turn your inventory over super fast in 9 days. You pay your suppliers in 21 days.
So, let us do the math. Three plus nine equals twelve. Twelve minus twenty-one equals what? Negative 9.
This would be a ridiculously awesome business to have, provided it is profitable. It would always be cash-flow positive!
Thanks for reading…
by MHolland | Jan 6, 2021 | Cash Flow
Timing.
And timing has two aspects to it.
The first is the timing of the prospects in your pipeline.
What is the best early indicator of your cash? The value of the interested prospects in your sales pipeline. I will show you how to get that figure.
Firstly, we will look at the numbers.
Number 1 – Possible Prospects in Your Pipeline
At the top of your pipeline are all the possible customers/clients.
This number shifts based on economics. For instance, imagine you own a restaurant. The number of potential customers eating out – in a pandemic – goes down. (And you can seat way less too).
However, the number of people eating at home (and not traveling) goes up!
You need to pivot fast. You must get home deliveries going. Then find creative ways to market to these “eating at home” customers.
The first number are the total possible clients in your area, for your business.
What is next?
Number 2 – The Number of Actual Prospects in Your Pipeline
Now you need a hard number. Who have you been in contact with?
This could be number of prospects reached through social media, direct mail, print advertising, and radio as examples.
This number is the top of your funnel.
We will go through an example…
You own a technology business. To reach a prospect you decide to run an email campaign.
Next, and this is critically important. You need to define and refine your Number 1 above – the number of potential clients for you.
Perhaps everyone could use some aspect of your technology services. That number is too big. You realize you have expertise in, say, non-profits and charities.
Great! Now get more specific. You want the ones of a certain size. It could be based on sales, or in this case, total revenue from donations. Or it could be employee size.
You buy a list of all organizations in your targeted niche from a company like InfoCanada.
Now you start connecting, and connecting, and connecting.
You see, you have to find out how many contact points it will take, on average before one of two things happen. (1) you reach a natural dead-end, or (2) you obtain a new client.
In other words, how many emails – three, maybe four – followed up with a phone call before you stop or convert.
Which leads to the third number…
Number 3 – Your Conversion Rate
How many people in your pipeline are pondering becoming your client?
There are actually two conversion rates here. The first is – the percentage of prospects who went from a name on a list to actually engaging with you.
The final conversion rate is the percentage of clients looking who become clients.
I will show you how this works:
Conversion rate #1
- Number of names purchased to email to – 1,000
- Number of prospects who looked at your offering – 300
Conversion rate number one – 30% (300/1,000)
Conversion rate #2
- Number of prospects who looked at your offering – 300
- Number of prospects who sign up – 50
Conversion rate number two – 17% (50/300)
Each tells a different story. Number 1 tells you how effective you are reaching the right audience. Number two tells you how good you are at converting an interested prospect to a paying client.
As in Comedy, Timing is Everything
Knowing the length of time, it takes for a name on a list to become a client is critical.
With it you can calculate the value of your sales pipeline at any point in time.
This is known as your sales cycle timing. It varies from industry to industry. A general rule of thumb is that the higher the value of what you are selling, the longer the sales cycle. It can even be years in some cases.
Before you get to the final number, you must know one more number. Your average sale!
Now you can create a cash-flow forecast with that solid dollar value of projected sales. You multiple the average dollar value of a sale, by the expected number of clients. You place that dollar value into the future month based on your average sales cycle.
Then you test, measure and tweak.
In Summary
Next week, I will write about the second aspect that affects your cash-flow timing.
Thanks for reading…
by MHolland | Oct 28, 2020 | Accounting Software
Submitting expenses can be a pain…
For you. For your employee. For your accountant.
With Xero Expenses it is easy to submit expenses.
Why use Xero Expenses?
Let me give you 3 reasons…
Reason #1 – It is Super Easy for Your Employee
With Xero Expenses you start by adding your employee as a user in Xero. You assign them “expenses”.
In the set-up you only need to give them “coding” access to the accounts they will use most of the time.
I will explain.
For instance, a salesperson will have expenses in just a few areas. Things like meals, mileage, auto repairs, office supplies, and maybe advertising.
You can “assign” just those 5 accounts to this employee. They do not need to go hunting through your entire Chart of Accounts to figure out where to code the receipts.
Now, here is where it gets cool.
Your employee just has to download the Xero Expenses app from Google Play or Apple Store.
From there they snap a pic of a receipt.
The software will extract the details for them – date, amount, vendor, and GST.
The employee checks for accuracy. They then code it to one of those 5 assigned accounts.
They hit submit.
Boom. Done. That was easy.
Reason #2 – It is Super Easy for You the Manager/Owner
Your employees have submitted the expenses.
You are an “approver”.
All you need to do is look at the expenses. Keep in mind all the receipts get attached for ease of review.
You hit the “approve” button on each receipt.
The items go to “bills to pay”.
Reason #3 – Plooto Makes it Easy to Pay
So far what has happened is that your employee has snapped pics of receipts on their smartphone. They have coded them.
You have reviewed and approved.
Now, your bill-payer software, Plooto takes over.
Plooto takes a look automatically inside Xero to check for bills to be paid.
It pulls over all the “approved” receipts for that employee.
In Plooto you look and pay those amounts. You can even take a last-minute peak at the receipts attached to each expense. All inside Plooto (it pulls the receipt with the amount to be paid).
You hit, “pay”.
Boom. Employee paid.
But wait! Plooto is not done yet.
It records the payment inside of Xero for you.
The cycle is complete.
Thanks for reading…
by MHolland | Oct 23, 2020 | Remote Work
I just read a good Blog from Regus (the global shared office company). Actually 2 blogs.
The first talked about 5 boundaries to set working from home. And who is not working from home (at least part-time), these days?
One idea is a new one for me. Our Team has been working from home for over 2 decades. I have not commuted in 23 years.
What the Blog suggested was a Fake Commute.
Most people hate their dreaded commute. Hours stuck in traffic every day. What is there to like?
Well, the commute was your time!
Now that you are at home, you need to reclaim your commute time. You do this with a walk around the neighbourhood in the morning before work! Great idea.
To read the rest if the ideas click here:
5 Boundaries Leaders Should Set
The other Regus Blog was about trust. As a leader you must trust your remote workers are productive.
I have written about this before. At ControllershipPLUS we trust our people. Our Team members flex their time. Yet they are super-productive. They get more done working from home.
Check out the “Trust” blog here:
Why CEOs Need to Trust Remote Workers
Thank you Regus for some great Blogs. And thank you dear reader for reading…
by MHolland | Oct 9, 2020 | Accounts Payables
When was the last time you wrote a cheque?
For me, I cannot remember. I have an ancient box of business cheques somewhere in my office, collecting mold. They are so old that the address is incorrect.
Think of it, dear reader, it is Covid 19 times. You are a mid-sized business. Perhaps multiple locations. Cheques need to be signed by at least two people.
The problem is hardly anyone is working at the office anymore.
What do you do? Sign the cheque and mail it to the next signer? Yikes!
This is just so wrong.
The Entire Cheque Cycle is Slow
That cheque, with one signature, is now in the physical Canada Post eco-system.
How long will it take to get to second signer? And then to the supplier? A week? 10 days? Two weeks? Oh my.
But wait! You have solution! Just pre-sign a stack of cheques and leave them with second co-signer. That will solve the problem, right?
Some of you may be either laughing (thinking of the obvious – the controls of 2 signatures have just been broken). Others, are thinking, “would anyone actually do that?”
It is done all the time.
Never Pre-Sign Cheques
A company we knew had the business owner pre-sign a stack of cheques for the bookkeeper to pay bills.
They were kept in the safe. “Safety first”, correct?
The bookkeeper had a new baby. The costs of giving her sweet baby everything she deserved was high. Toys are expensive on a bookkeeper’s salary.
These signed, blank cheques were sitting there, a severe temptation. Like wine in the fridge to an alcoholic.
Would the owner even notice if a few cheques ended up supplementing her low wage?
She secretly filled out some cheques payable to her credit card, not the owner’s. This went on for years.
She coded the “expense” to inventory. (Perhaps she was thinking how fitting – inventory of toys and things for her baby).
The owner never discovered the fraud. Finally, (and this is usually how these things are revealed), she took a holiday. The relief bookkeeper could not reconcile the bank. She got suspicious, and uncovered the fraud.
The morale of this story is – never pre-sign cheques.
Why Do You Trust the Physical and Not the Virtual?
When a signed cheque leaves your office, it can be intercepted.
Think of all the stops along the way. Your office (before it is mailed). The mailbox. The routing stations at Canada Post. The office where it is being sent to.
It is a crap shoot.
Cheques intercepted are acid washed. The payee changed. You would not recognize your signed cheque when you see it.
Compare This to an Online System
We use a Canadian company called Plooto for online bill payments.
Bills approved for payment in the accounting software are synced to Plooto. The source documents move with the bill.
Inside Plooto you can set a simple or complex payment approval matrix.
Payment approvals can be set to require multiple approvals. Dollar amounts can be set so that the owner is not having to sign everything.
Everything is approved virtually, online.
There is an audit trail.
The payments go through the Canadian payments approval process, just like a cheque would.
The supplier can receive the payment via email. They log into their bank using their own bank credentials and deposit the money you are sending.
Some Interesting Stats
Australia has virtually eliminated cheques. The banks charge about $50 to process a cheque. Not much of an incentive to use cheques!
The overall numbers are interesting – 5% of payments are paid by cheque in Australia.
In Canada?
In 2019, 39.38% of all payments were by cheque. If you remove personal payments, the business cheques are significantly higher.
My coaching – stop writing cheques.
You will save time, money, and reduce risk of fraud.
And in Covid 19 times, online bill payments just make sense!
