The Mind 🧠 of a CFO

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Actionable Insight - How to Improve Cash Flow in Your Business

Selling your business is the ultimate goal for most entrepreneurs. I've seen multiple fail because the number in their head didn't match reality. In my Inc. article, Trumped Up Numbers Won't Fool Buyers: Three tips to increase your business's value--without fudging the numbers, I discussed creating a solid cash flow to increase business value. In this issue, we will dive deeper into how solid cash flow comes from having above-industry gross margins, collecting cash faster than you pay out cash, and controlling costs. Here is how we approach these at a2:

1. Embrace Value Pricing Over Billable Hours

The billable hour has long been the cornerstone of pricing strategies in service industries. However, this approach often limits your potential to earn what your service is truly worth. By transitioning to value pricing, you align your fees with the perceived value of your services, not just the time spent. This method encourages innovation and efficiency and focuses on delivering outcomes that matter to your clients. It's a win-win: clients appreciate the transparency and results, while your business enjoys higher margins. Here is an even deeper dive into pricing in your business.

2. Efficient Cash Collections

Unless a contract requires it, 30-day plus terms should be a thing of the past. They were designed to factor in a non-automated process that involved mail.

In professional services, technology is your ally in achieving near-zero days in Accounts Receivable (AR). Tools like Ignition, as used by a2advisers, streamline billing and collections, ensuring you get paid promptly for your services. This improves cash flow and reduces the administrative burden of chasing payments. For trade service companies, adopting practices like requiring deposits or billing materials on the first AIA (Application for Payment) can significantly accelerate cash inflow, contributing to a healthier financial position.

3. Control Costs from the Ground Up

Cost control is an essential aspect of financial management, especially for service businesses. If your operating income is less than 10%, it's a red flag that warrants immediate attention. The first step in cost control is often evaluating your largest expense: payroll. While having skilled staff is vital, it's equally important to ensure that payroll costs align with your business's financial health. Implementing Key Performance Indicators (KPIs) related to payroll efficiency can provide valuable insights and help make informed decisions. Here is an even deeper dive into people KPIs.

Implementing These Strategies

Implementing these strategies requires a shift in mindset and operations. It's about recognizing the value your business offers and ensuring that every aspect of your operation, from pricing to cost management, reflects that value. This transition might seem daunting, but the rewards are substantial. Not only will you see an increase in business value, but you'll also build a business that's more resilient and adaptable to market changes.

Conclusion

In the fast-paced business world, adapting and optimizing your strategies for cash flow management is not just a good practice; it's a necessity. By embracing value pricing, leveraging technology for efficient cash collection, and controlling costs effectively, you set your business on a path to financial success and sustainability. This path will lead you to realize a higher business valuation when you sell your business.

Thanks for reading, Luke Templin!

P.S. There are two ways to work with Luke to grow your business profitably.

1. Virtual CFO Cohort for service-based entrepreneurs with $250k - $1 million revenue

2. Fractional CFO for service-based entrepreneurs with over $1M in revenue

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