Financials and Cash Flow

Explaining the operating cycle of your business to your partners

Tips for working with your vendors, customers, and internal partners to minimize your operating cycle.

Published: January 18, 2019

Many quickly expanding businesses encounter a counterintuitive problem: They’re growing too fast for their own good. Orders are pouring in, they’re spending aggressively to fill them, and while they’re waiting to recognize customers’ payments, they run out of cash.

“They go out in a blaze of glory because they just don't have the cash to support themselves — and they can't figure out what happened because [on paper], they're profitable,” says Jim Stice, an accounting professor at Brigham Young University’s Marriott School of Accountancy.

Calculating your company’s operating cycle, the period of time between your initial cash outlay and receipt of payments, will help you understand why you’re feeling cash-strapped during a period of intense growth. The real magic comes when you work to modify this number by pursuing more favorable terms as a buyer, seller, and business partner.

“Growing a business the right way is not only about growing revenue, but also about maximizing the efficiency of your business,” says Rob Myers, national small business strategy and development leader at Wells Fargo.

To ensure this efficiency sticks, it’s important to make sure management understands the importance of optimizing your cash cycle. You may discuss with your internal partners:

  • The value of integrating financial projections. The successes or shortcomings of cash flow statements and profit-and-loss statements are inherently linked, but it can be easy to overlook how one impacts the other. Make an effort to review these items as one, so everyone understands cash flow’s impact on the bottom line.

  • Automating and outsourcing processes. If the invoicing process is conducted manually, it may be both taking up valuable employee hours and slowing down the cash cycle. Outsourcing payroll can also be a key step to shrinking the cycle for expanding businesses.

  • Protocol for bridging cash flow gaps. When cash is needed for a business transaction, where do the funds come from? In addition to benefiting the cash cycle, implementing clear protocol for how each department manages cash may make it easier for employees to fulfill their duties.

Your operating cycle is also largely impacted by your vendors’ and customers’ payment policies. You can pursue multiple strategies with these partners to shrink the cycle: try to slow down the flow of cash leaving your business, and accelerate the pace at which you get paid.

Vendors

Your vendors may be especially willing to offer more flexible terms, because as your business is growing, you’re becoming an increasingly important part of their own balance sheet. Myers says it’s worth approaching them and attempting to negotiate, noting: “It’s about understanding the opportunities that may exist — checking with the vendors that have 30-day terms but perhaps are open to 60-day terms.”

You can also ask your vendors about a trade discount: a deduction from the list price of goods agreed upon by both parties. If you don’t have the cash on-hand to cover a year’s worth of costs, consider using a line of credit to help cover these expenses. For instance, if a trade agreement gives you a 30 percent discount over the course of the year, and your line of credit has an interest rate of 10 percent, you still come out ahead in terms of cash flow. Use a discount calculator to help guide your estimates.

Customers

The same idea applies to your customer relationships. If you want to get paid more quickly, “one option is to go to your customers and negotiate them paying you sooner,” says Stice. You could make them an offer — a discount, perhaps, in exchange for faster payment. Retailers may also consider easing customer payments by accepting debit and credit cards. If needed, this is another area where a line of credit may be useful for reducing cash flow gaps.

Of course, your bank always remains a valuable resource. You can use credit facilities to bridge big orders or navigate seasonal fluctuations in your business.

But ultimately, you’ll want to grind your operating cycle down to the smallest number possible, and you may find that in doing so, you’ve improved your company’s health as much as a spike in revenue would.

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