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One thing is certain: To every business on the planet, cash is the equivalent of oxygen. Without cash, your company will suffocate and go out of business. As with oxygen, if you don’t have enough cash, your business will limp around in a zombie-like state, struggling to take advantage of opportunities to fuel growth. Cash is what funds the initiatives that scale your business.
Improving the speed of your cash conversion cycle and reducing the amount of working capital you need to operate your business will free up the cash your business needs to grow. It will also massively reduce the stress and drama of running your business.
Thanks to Verne Harnish’s pioneering work in Scaling Up, savvy CEOs know to look for cash in a place where most don’t—upstream in the sales cycle!
1. Sales Process
Most CEOs and CFOs make the mistake of not looking upstream into the sales cycle for cash. However, if you think about it, how many millions of dollars of promised revenue in your pipeline could be converted with better strategies and execution?
As shown in Scaling Up’s CASh: Cash Acceleration Strategies, if you factor the sales cycle into the overall cash conversion cycle discussion, you can free up latent cash by directing strategies in the sales cycle to shorten conversion time (days to close).
Used with permission of Scaling Up, A Gazelles Company
The absolute first place to look for cash acceleration in your sales cycle is the sales process. Now, while most companies will tell you they have a documented sales process, I find that eight out of 10 companies cannot produce a documented process when asked, and even if one exists, nine out of 10 times it is not used consistently. In other words, talk is cheap and results are priceless!
Sales experts agree that implementing and following a documented sales process produces an almost immediate boost in sales of 10–20%. Done correctly, a proven, documented sales process will also take days out of your sales cycle, freeing up precious cash both by accelerating closing opportunities and not wasting money on poor prospects who will not follow your sales process.
Example of Documented Sales Process:
So the questions you should be asking yourself are:
- How good is your existing sales process?
- How well is your process followed by every member of your sales team?
If you are honest with yourself, the answers to those two questions are probably not very good. Improving them will free up a treasure trove of cash in your sales cycle.
2. How Strong Is Your Sales Playbook?
Have you ever watched a collegiate or pro sports team execute a complex play and marveled at the precision of both the strategy and the execution? That’s because the leaders (coaches) scout their opposition and devote the time to develop and practice proven plays that have a very high likelihood of success. In fact, the playbook serves as a sports coach’s fundamental tool for success. Without a playbook, they have very little else to coach on. They train their team based on the playbook and it is the foundation for every game plan. In fact, as leading sales expert and Scaling Up contributor Jack Daly describes it, “They would never consider putting players on the field without training and practicing before they play the game.”
So how about you? How good is your sales playbook? Is it used and practiced? Or are you putting untrained salespeople out in the marketplace to practice on your prospects?
Is the concept of a sales playbook new to you? There should be playbooks for every function and department in your organization. It’s your how-to guide, the repository of proven processes for your organization. They are more practical and streamlined than SOPs. I recommend you literally start with a 1” binder. Don’t go bigger or it will scare people and they won’t read it.
Next, get a 20-tab set of dividers and begin outlining your playbook’s table of contents—organized into 20 bite-sized sections of content for easy organization and readability.
Playbooks are living documents. The best ones are referenced and updated with new processes and best practices on a regular (even daily or weekly) basis. These updates are based on firsthand use and experience from the marketplace.
3. How Accurate Is Your Pipeline Process?
When I train on sales, I ask the leadership team whether they have a pipeline…or “pipe lies!” All comedy contains an element of truth in it—and after they laugh, they often fess up that they actually have a “pipe lies” process that they have little faith in. The reason for this is that most pipelines are based on an arbitrary percentage probability estimation rather than a specific, stage-gate process driven by a defined sales process.
To get immediate improvement on the quality and closing accuracy of the pipeline, I recommend that clients adopt a pipeline that looks like a baseball diamond from sales expert Dave Kurlan’s excellent book Baseline Selling. This is because most pipeline processes, like that of Salesforce.com, are too complicated and arbitrary. (Have you ever heard of anybody crediting Salesforce with additional sales performance? I sure haven’t!) But everyone understands baseball. Follow the simple principle that defined stage gates need to be met by customers before opportunities can advance bases, running your pipeline process on a simple baseball diamond as illustrated below. Doing this will clean out the “pipe lies” and allow you to strategize on the next steps to advance qualified opportunities and close more quality business faster—accelerating your cash conversion.
One final note on pipelines: Pipeline reviews are best done by your entire leadership team on a weekly or biweekly basis. I have found that the best practice is to actually have the CFO run the meeting in his/her capacity as Chief Revenue Officer (CRO), looking to improve profits and cash flow with a dispassionate mindset. The CFO/CRO can then challenge the sales team to prove the opportunities are worth advancing up a base. Your COO and CEO will also want to be present to ensure that production and delivery expectations are aligned with what the sales team is telling customers.
Think about making your pipeline revenue process the precursor to your overall financial system. This is a great process to define KPIs in your Scaling Up Process Accountability Chart (PACe). Making these straightforward structural changes to your pipeline review process will result in an acceleration of both sales and cash.
4. Stop Discounting: Price Is Your #1 Profit Driver
If your top objection from customers is not price, or if your salespeople are not hounding you to drop prices in order to win business, you don’t need to read this section. However, if you are like 97.5% of businesses, your salespeople suffer from money weakness, and dropping the price is their go-to move.
This discounting is absolutely fatal to your business. Salespeople will try to tell you “they will make it up on volume” but this is a fool’s errand as the dynamics of the price, gross margin, and volume relationship make this impossible—both mathematically and realistically.
As this Power of One analysis we generated for an example business in Scaling Up Cash shows, if salespeople discount by the most common price drop of 10%, they will have to commit to selling 33% more to make up for the lost profit. That represents $4,200,000 of this firm’s 31% gross margin. How many of your salespeople will sign up for this deal? If they are smart, they will not!
Price is the most powerful profit and cash improvement tool for every business, everywhere, for two reasons. First, it is the only action you can implement overnight to improve your profit and cash-flow situation, so you get the fastest impact. Second, unlike with a volume increase, an increase in pricing does not impact inventory, which is a voracious consumer of cash.
The below Scaling Up Cash Power of One analysis shows the impact of a 1% improvement in price, volume, COGS, and overheads along with a corresponding improvement in accounts receivable, inventory, and payable days (all seven of the cash flow levers). This analysis clearly shows that a 1% improvement in price has the biggest impact on profit improvement by a wide margin and a very large impact on cash (second only to COGS for this company due to their particular AR and inventory levels).
Each company will have its own unique Power of One signature based upon its current margins, fixed overheads, AR, inventory/WIP, and AP. However, price will inevitably be the biggest profit driver and one of the biggest cash drivers regardless of the firm.
Led by price, improving all of these seven levers by as little as 1% will lead to spectacular profit and cash improvements in your business. And if you can increase any of the factors by more than 1%, go for it!
5. Ask for Deposits and Negotiate Better Terms
The final way that your sales team can directly contribute to improving your cash conversion cycle is by requiring deposits and negotiating better terms with customers. These two actions are the quickest and most direct ways to lower your AR. What percentage of business are you getting deposits on right now? If you are not getting 50–75%, you are likely giving business away for free.
Scaling Up CEO David Harding of Tipton Mills Foods gives this simple advice about asking for deposits: “It works! Get over the initial fear of asking, tell your new prospects that all of your existing clients pay deposits. Tell them that paying a deposit is their way of securing time and effort and you use deposits to prioritize your work because you know who is serious about a partnership. Train your entire team to get skilled at securing deposits. That’s the way to do it!”
Likewise, many large companies would love to have you under Machiavellian payment terms of 60, 90, or even 120 days! This has certainly been a trend of consumer packaged goods companies like Church & Dwight, Procter & Gamble, and Heinz, who have jumped on the bandwagon of shamelessly using their smaller suppliers as banks in the name of improved cash flow and cash management flexibility at your expense.
As with most things in life, terms are negotiable. Use your unique competitive advantages (finding these is why a differentiated strategy on your Scaling Up One Page Strategic Plan is critical) as well as supply chain shortages to negotiate sub-30-day terms. Your sales team needs to be trained and practiced in this negotiation. Otherwise, larger companies will happily pass their cash-flow problem on to you.
Coach Up Your Sales Team to Improve Your Cash Flow
Fundamentally, nothing happens without a sale. And because sales is the fount of the cash conversion cycle, it is the foundational place to improve your cash position. This happens through your sales process, playbooks, pipeline, and pricing actions, as well as negotiating better terms and deposits.
As somebody who sells every day, I am a big fan of salespeople. But great salespeople are made, not born, and they require adult supervision! Get your entire executive team involved and aligned on landing big pursuits. In other words, become an organization that is great at selling.
To learn how to become an organization that is great at sales and cash-flow management, schedule a coaching session with me and we will build a plan to achieve better results.
Verne Harnish sent me here. Excellent article! I love the baseball analogy. I’m looking forward to sharing this with my team and franchisees. Keep up the great work.
Ross, so glad you found value in the article. Thank you for the kind comments. Keep Scaling! -Rick