Archive for May, 2009

Managing Your Cash Cycle for Maximum Potential Part 1

Monday, May 18th, 2009

Growth requires fuel. That fuel is cash, credit, or capital. Besides having enough customers, the need for cash is the single biggest obstacle a growing company has. Very few companies are capitalized at the level necessary to adequately fuel their growth. Consequently, they’re busy, but haven’t got the cash in their bank account to pay their bills and buy more goods. The first step toward managing your cash flow is to understand the Cash Cycle.

The Cash Cycle starts with cash in the bank. You buy raw materials and pay your workers as you create the final product. You convert your available cash to Work In Progress (WIP) or Inventory in this part of the cycle. This can last for a few hours or much longer depending on how much work you have, how you buy your goods, and how long the goods are in the production process.

When you’re done printing the job, your WIP or Inventory is converted to Accounts Receivable. If you collect right away, this isn’t a big problem. But if you have to wait for your money (eg Net 30 days or longer,) you’re in for a big challenge. Not only are your funds tied up in the job, but so are your margin dollars or profit. Your main objective is to get your original capital back, along with your earned margin, as quickly as possible.

The smaller your margin, the more important this becomes. Your margin (the amount above the material and manufacturing costs,) determines how you pay your bills, your credit rating with suppliers, and how much money you have left over to pay yourself, buy more goods, and grow your business.

This cash cycle is the engine that drives the company. When your margins are too low, you’re effectively spinning your wheels and going nowhere, even if you have a perfectly tuned cash cycle. If it takes you a long time to collect your Accounts Receivable, you can starve yourself right out of business. It’s far easier to over produce than it is to manage your cash flow. Yet, effective cash flow management is what allows you to produce at maximum capability.

The Cash Cycle is a series of conversions. You convert available cash to WIP, you finish the job, add your margin, and convert to Accounts Receivable. Finally, when you collect from your client you get your original capital back plus the margin you’ve earned for your services. The greater your margin, and the faster you turn the cycle, the greater your cash flow and profit.

In our next installment, I’ll be outlining all the ways you can increase the cash flow cycle to take the pressure off. Done properly, you should have a positive cash flow, meaning there’s more money left over after all the obligations have been met. What’s left over determines how fast we can grow and how much we can produce during any given time period.

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Are You the Local Authority?

Monday, May 11th, 2009

One of the common problems I hear all the time from t shirt decorators is “my customers don’t take us seriously.” In general, the public sees apparel decorators as “just another t shirt guy.” We want, no need, to be recognized as the premiere authority of decorated apparel in our market or niche. Our credentials must be unchallenged. Our technical ability recognized by the by the marketplace. Our reputation must go beyond our local market/niche to encompass everything about how our product is used, but how do we accomplish this?

We want people to recognize the opportunity to have access to our skill set locally and to feel welcome in doing so. Part of accomplishing this involves our risk reversal or guarantees. We want our clients to know they’re welcome and that the business they do with us will be a positive “experience” they can talk about and pass on to others.

Jay Abraham calls this “Preeminence.” We want to encompass everything about what we do and how we do it. We are here to exceed the expectations of how our clients use our products and delight them with the final outcome.

A goal of Preeminence is to create a story that goes along with the experience. The easier we can make it to tell the story, the more word-of-mouth referrals we receive. This is important because a referral comes to us with a different expectation and a different mindset than someone off the street who doesn’t know us or what we do. Those individuals require much more time and effort for us to differentiate ourselves and prove we’re who we say we are and that we do what we say we will do

A second major goal of Preeminence is the role of authority. If you are truly an authority, your objective is to completely educate and position yourself as the only logical provider of the goods and services your customer is seeking. In this capacity, you have an OBLIGATION to completely inform and educate those you do business with. In the process, you will automatically differentiate yourself from all of the price cutting, low balling, fly-by-night competitors that are continually starting up and closing down.

It’s important to understand the role of education is all about just one thing, education. This isn’t some hidden sales pitch. The commercial focus is minimal to nonexistant. Our entire goal is simple to build confidence in our position as an expert in the market at what we do.

In my next post, I’ll go into the concept of Reciprocity, a condition that develops as a natural result of giving information away at no cost.

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Product, Process, and Performance

Saturday, May 2nd, 2009

Recently I had a conversation with a frustrated t shirt screen printer who lamented that he thought he was doing everything right but he just wasn’t making any money. He commented that no matter what he did, his customers seemed to be only interested in the lowest possible price.

What he was observing is something that happens all the time. Companies that focus on product (t shirt printing) and process (screen printing) have no real value in the market. The reason I say this is because there will always be somebody offering the product and service for less money. It’s always been that way and it will continue to be that way. It’s not just our industry, it’s every industry. It is the nature of the quest for the lowest cost producer.

The real issue is that we are in the visual communication market and our media is wearable apparel. This may not seem like much of a difference, but it is a world of difference. It moves us away from the manufacturing or fabrication aspect (which can always be found cheaper somewhere else,) to the marketing and communication aspect. This is were it is more important to have our message delivered in the most relevant and effective way, and to have it stick.

When we start looking at what we do from this perspective it opens up all kinds of new opportunities. This is especially true if we can track or monetize the results of our efforts. This return on our invested efforts makes it possible to uncouple our offering from the direct costs associated to make the product. Think about this. Does someone really care what the t shirt is going to cost if it can be a proven revenue generator for them? In other words, if they spend $10.00 to create $50.00 of new revenue, do you really think they will try and hammer the price down to $4.00 or $5.00 in the hopes of capturing the same business?

The answer initially is yes they will, but it’s only a temporary situation. They quickly discover the difference they’re paying is what enables the new revenue in the first place. When they cut back the purchase to have “just another t shirt” they lose the ability to create the new revenue in the first place. The graphic image (graphic design, art, color separation, etc) is what makes it effective advertising. It’s what differentiates it from every other mediocre printed t shirt that gets lost in the crowd.

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Signs of economic recovery?

Friday, May 1st, 2009

I was talking with one of the equipment financing companies last week. I was asking them how their collections were and if they were seeing any kind of an up tick. They said it depended on where you were (upper midwest is a disaster). She said the older companies that were not too leveraged were beginning to show signs of recovery, but everyone else is pretty much where they were.

Even if the economy is starting to show some faint signs of recovery there’s something else to be aware of. More new business does not necessarily mean you are headed out of the woods. The problem is that it takes money to make money. You need capital to fund new business. Simply put, you need to buy raw materials to convert to orders, and you need to be able to carry accounts receivable (AR) until you get paid. You need to collect your AR before you see any increase in your available funds to pay your bills.

When you fall behind due to slow business, you use up your available working capital. When it comes time to fund new business you have only three choices. The first is to get enough money from your customers as a deposit to pay for the goods you need. The second is to get your suppliers (vendor finance) or bank (line of credit) to advance you goods or credit. The third is to put more capital into your business, either from your savings or from additional investment.

All of these are getting harder and harder to accomplish. Oddly, the easiest one we’ve found is to get our customers to front the deposit. In the past they have been reluctant, but with all the news of tight capital markets, most are aware of just how hard it is to get credit for small business. Consequently, they’ve been much more willing to pony up the deposit. Play up the tightness of the markets and this will help you as well.

The second part of the cash cycle equation is getting paid on the back end. Once you deliver the job, you really can’t wait to convert accounts receivables to cash. If you aren’t taking credit cards, do it now. Many companies use commercial credit cards to build airline reward miles. This is a benefit to them and you. You give a few points on the front end to have your cash available pretty much immediately.

If you allow your customers to go 10, 15, 20, or 30 days before paying, you will simply run out of money trying to finance your own recovery. This is one of the most common situations for companies that close their doors. They are litereally busy up to the day the shut down. Being busy is only one part of your success. Cash liquidity or your access to available cash is critical to your on going success.

I think we’re going to seek A LOT of business failures this summer, especially if business begins to pick up. All these companies who are stretched thin and behind now are going to run out of cash trying to finance recover

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