How to Double Firm’s Cashflow without Increasing Sales
Part 1
Optimising firm cashflow is easier than you think. The key is making small adjustments across several KPIs which deliver a combined positive effect.
The KPIs you need to measure, and affect are:
Work in progress
Job completion latency
Profitability
Commercial arrangement
Work In Progress (WIP)
WIP is a measure of the mount of work that has been done, but not been yet billed.
For example, if a job is £10,000 and you have done £3,000 of work and billed £1,000 then your WIP is £2,000.
Your WIP is the amount of cash you can collect based on work you have done. Monitoring your WIP and structuring commercial contracts such that you can frequently clear down the WIP (i.e., collect cash) makes a significant impact. To make cashflow better, setting a maximum WIP number can really help collect the cash.
Additionally, measuring a relationship between days since last invoice and WIP can be an effective way of spotting jobs which are opportunities for invoicing. See graph below:
Job completion latency
This KPIs measures which jobs are stalled, and which can be closed sooner, and therefore release the final invoice faster.
An effective way to measure this is to look at the relationship between WIP and the last activity.
Part 2
Profitability
Lack of profitability on jobs has a negative cashflow impact, in consuming staff resources (and cash) without bringing new cash in.
Increasing just a few percent on profitability of jobs, has a remarkable effect on cash. Analyse this by looking at the gross margin on jobs, and particularly at whether the revenue curve is increasing and decreasing in parallel with how the revenue builds up.
Commercial arrangement
The way you manage commercial risk on a job has a direct effect on cash collection. Increasing up-front payments on jobs generally has an immediatepositive effect. Moving the upfront payment from 30% to 50% or 70% has an immediate positive effect on cashflow.
Similarly, with subscription payments, giving a discount of 5-10% for an annual payment will have a dramatic effect on your cash collection.
In some environments where there are fixed price jobs, and there is a possibility of the scope being disputed, it is worth setting cash collection targets against deliverables which cannot be disputed. This ensures that the final 5-10% of cash collected is only based on deliverables which are higher risk, and the rest of cash collection is on deliverables which you can easily prove.
These changes in themselves may seem minor, but cumulatively that can easily double the speed at which you cash collect.