Is your cash-flow cycle killing you slowly?

Poor cash flow can be a real killer, and can sink your business pretty quickly if you don’t stay on top of it. WE LOVE NUMBERS member, Grow My Team, were suffering major growing pains when we started working together, with business rolling in, but never any money in the bank to fund the additional resources they needed. We implemented a couple of changes and they’ve since more than doubled in size…

 

Here’s how to extend your cash flow out, and double your monthly revenue.

 

As entrepreneurs we’ve all experienced moments of frustration when we’re comparing the so-called profit amount appearing on our monthly financial statements, and then scratching our head because there’s no money in the bank! There are a number of reasons for this of course, however one of the most common problems is that a bunch of invoices have been raised, yet payment hasn’t been received for all of them. Chasing debtors for some businesses is a major headache, can be very costly, and can lead to significant problems if not addressed. Earlier this year we worked with one of our members on sharpening up their cash flow cycle with exceptional results…

 

The problem. Grow My Team were facing this exact problem each month following their invoicing. They are a global talent recruitment and management company, placing team members located in a variety of countries (including Philippines and South Africa) into companies located primarily in Australia and the USA.

Each month they invoice their clients for the hours that their staff members have worked, and await payment. Oftentimes clients were late to pay, and needed to be followed up in order for the cash to start rolling in. Luckily for Grow My Team, they have great clients who are all ‘payers’ and they didn’t have any real issue with bad debtors and having to get collection agencies involved (a whole other kettle of fish). The main issue was clients simply forgetting, or not prioritising paying their invoices on time.

 

The implications. The biggest risk for Grow My Team became having staff members continue to work, when their ‘employer’ (Grow My Team’s client) hadn’t yet paid. In the worst case scenario should a client not pay, Grow My Team would be left to foot the bill to the staff member for any hours worked in the meantime.

The main concern though was cash flow. Grow My Team was constantly having to pay the monthly wages on to their contractors, when they hadn’t yet received all of the income from their clients. This was leaving them with an extremely tight cash flow during the first half of each month. This was crippling their growth as they had no working capital to invest in expansion and becoming an increasing strain as individual clients hired more staff creating larger monthly (overdue) bills per client.

For a company with huge growth targets, and demand to match, this cash flow cycle was becoming a major constraint, or bottleneck, within the operations of the business.

 

The solution. After analysing the options, we determined a three pronged approach to significantly improving the cash flow cycle for Grow My Team.

 

  1. The first cab off the rank was getting invoices paid on time, and this was surprisingly the easiest to fix. We used a Xero plugin called InvoiceSherpa and set up a tailored invoice follow up schedule. InvoiceSherpa connects with Xero and automatically chases up outstanding invoices based on parameters you determine. We crafted clever and caring email content so as to position the follow-ups as friendly reminders, and not to offend anyone (we’re now 9 months in and Grow My Team have never had a complaint about these email reminders).
  2. We then had to set some new boundaries and expectations with both existing and new clients. Starting with all new clients, and then rolling out slowly to the existing clients, we changed the billing structure to payment in advance for the month ahead (176 hours for each full time contractor, and 88 hours for each part time contractor), and updated the service agreement to include a condition that as soon as an invoice became overdue, the clients staff would be asked to cease working. This measure is a worst case scenario. In an ideal world it never has to be implemented because it’s not good for the client relationship, and it’s definitely not good for the staff member (who only gets paid for the hours they work). Thanks to InvoiceSherpa though 96% of invoices were now being paid on time anyway. These changes were rolled out over time and for existing clients were handled through one on one discussions.
  3. The final piece in the puzzle was to build in an extra layer of protection for Grow My Team, and also to extend out the cash flow cycle further to give them more access to working capital (rather than just fixing the issue of being paid on time), was to extend out the contractor’s payment date to the middle of the following month, for the previous month’s work. This was managed over a 3 month transition period for the contractors so that they could each manage their personal finances for this change, but also opened up an additional opportunity…

 

An extra benefit. Grow My Team are now able to offer small loans to their contractors (equivalent to a half-month salary) for the specific use of upgrading their computers or working environment. Their contractors work from home, keeping hourly wages down for clients, but have a contractual obligation to the company to have a certain standard of home office setup. By extending out the monthly pay date, Grow My Team will essentially always have two weeks of hours worked as security against these small loans (should the contractor default payment), and can provide this extra benefit to their loyal contractors.

 

The entire solution developed through our Finance Team membership extended Grow My Team’s working cashflow cycle from a couple of days to 45 days, and enabled them to build in a substantial benefit to their contractors making the company an even more appealing organisation to work for. As a result Grow My Team were able to commence building out their sales team, their monthly run rate has subsequently doubled in the last six months, and their trajectory is looking very healthy for a company that is just over a year old.

 

If you’re having cash flow challenges (let’s face it – aren’t we all?!), chat with one of our Profit Coaches to find out how we can help you improve your cash flow.

 

Otherwise, check out this other article about Google Inbox that was an email management game changer for our co-founder, Sarah Riegelhuth.