Welcome to The Dare to Scale Show

Episode 13

Unstuck Your Cash

This month, at The Dare to Scale show we're focusing on the finance aspect of the business. In today's episode, we're reviewing the Cash Conversion Cycle.
This is one of the most essential metrics to measure the efficiency of cash management within your business, and without knowing where your money goes and flows, you'll have a difficult time scaling up your business.
That is why today we're discussing the 4 key areas within that cash conversion cycle that you need to look at as well as ways to improve how money flows within your business.
Episode Highlights:
  • 03:25 The 4 key areas in the cash conversion cycle.
  • 09:19 Tips on how to shorten the billing and payment cycle.
  • 12:51 What this means for your business' scaling up.
If you enjoyed this episode, please leave us a 5-star rating so that more entrepreneurs find this podcast, get the value, and get help scaling forward in their business.
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Episode Transcript
Warsha 00:01
Welcome to the Dare to Scale Show with me Warsha.
Evan 00:04
And me Evan.
Warsha 00:05
So, what is Dare to Scale, over the years that we've been coaching founders and business owners, much like yourselves. We've worked through a framework called Dare to Scale.
Evan 00:18
Dare to Scale indeed. That framework has helped loads of business owners. That is what this show is all about. So, put on your big picture thinking hat.
Warsha 00:28
Oh and your headphones, and come join us and enjoy the ride.
Warsha 0:38
Hello and welcome to a brand-new month.
Evan 0:41
Hi, how are you going?

Warsha 0:42
This month is about the all-important cash or the finance side of your business.

Evan 0:48
Absolutely, no cash no goal, so it's about having the cash in your business and particularly is about the velocity of cash through your business.

Warsha 0:55
Oh, very nice. So, I want to play a scenario. Before we go into the topic at hand.

Evan 1:01
Alright what's that?

Warsha 1:02
What happens in a typical business, when the monthly books are closed.

Evan 1:06
Okay so, you have done your sales, you have done everything, the accounts department come together and collate the information and close the books produce a profit and loss, produce a balance sheet and possibly a cash flow statement. So, you've got a snapshot of where you are.

Warsha 1:18

Evan 1:19
And as a very busy founder, what do you do.

Warsha 1:21

Evan 1:22
Show me the P & L. Oh look, here is the profit number Giddy up. We're in the black, we're good. Next.

Warsha 1:27
I know, that is the most common scenario. And that's, it's like a normal, let's say a proposal scenario as well what does someone do when you send someone a proposal.

Evan 1:37
Same thing right.

Warsha 1:38
Flip it straight back to say what it's going to cost me. And the same thing happens when someone looks at a profit and loss is kept straight right to the end of the page, and to see, what is the number look like, and that's it. But what you find at the last line of the P & L is just a snapshot, where your attention as a founder needs to really be is hidden within the line items of that P & L.

Evan 2:03
Oh totally individual profitability, you need to have a handle on that. If you have unprofitable loans. Stop them. But if you're just looking at a profit number at the bottom other sort of details are hidden.

Warsha 2:14
Yes, they are.

Evan 2:15
Labour costs, where you inefficient, what some cost you have what fixed costs those sort of things if you don't have a hang of what those are you might be in profit. But when there's something that comes along that disrupts your business. All of a sudden, it's not going to be profitable, and you'll be caughten awares.

Warsha 2:33
So the methodology that we're going to go through today is called the Cash Conversion Cycle.

Evan 2:38
Totally and just to frame that let's consider your service business, you have a client, and you have service if you've got somebody in your business looking after their client for month, after month, you'll pay them at the end of the month, you will bill your client. And if your client then takes 30 days to pay you, and you're still servicing them. You have pay roll for two months before you've been paid for one month. So, we're talking about that Cash Conversion Cycle you have inputs that you look at, and by the time you get the cash back out into your bank account, you already have one month outstanding of all payroll so you have money stuck in the system.

Warsha 3:14
Yep. So, we're going to go through the Cash Conversion Cycle today, then also talk about the some of the cycles, within the business where money is usually stuck.

Evan 3:25
Yep, totally it's four key sort of areas that you look at just get your head around. Can I just say something? When you're taught, finance, commerce and business in so many cases to get the results together, produce a profit and loss and even in management accounting you might delve into some of the numbers. And there's always this this notion of cash that the business is throwing of all those things are great, but very rarely, are you taught about the full Cash Conversion Cycle.

Warsha 3:55
That is true.

Evan 3:56
The money going in at some point, whether it's wages, whether it's inventory, whether it's, whatever it is, and how many days it takes for you to then make a sale, collect the money from the customer, and that's where we're saying if it's 60 days or more you've got a problem but if you can reduce that that's a great thing.

Warsha 4:12
And that reminds me Evan of something that you say when you're mentoring some of your mentees when somebody looks at the last line of the P & L or in, just as you were saying, when you were taught about finance or in commerce when you're taught about what happens within the business that's only half the picture.

Evan 4:32

Warsha 4:33
The other half of the picture is when you actually go deeper to see what are those four cycles, and how is cash flowing through them.

Evan 4:41

Warsha 4:42
So, when people talk about cash flow. They're only talking about what is the cash available at hand, and how to increase it. So, the Cash Conversion Cycle almost as a how to tool.

Evan 4:52
I think it is a how to tool, definitely, and it just helps you focus on specific areas.

Warsha 4:57

Evan 4:58
That need your attention and just so you know that there's no holdup or bottlenecks there. And the first one is Sales Cycle.

Warsha 5:05

Evan 5:06
So, you have sales and marketing people, whether it's marketing or sales or both, you might have online systems you might have all sorts of things but you have a pipeline, talking to your customers there's effort involved. Can you shorten your sales cycle? definitely talk to your customers and prequalify them sooner, get them on board and get to where you're working with them sooner. What's the second one Warsha?

Warsha 5:29
What's the second one. What if it's a product that you are as an actual physical product, so whether you are a trading in a product, or you're actually manufacturing a product so then it becomes the manufacturing cycle.

Evan 5:41
So it's a manufacturing cycle which then becomes inventory because it's all hand.

Warsha 5:45
Exactly. So, if it's a manufacturing cycle it includes inventory of your raw materials.

Evan 5:50

Warsha 5:51
If it's a trading business then it includes your actual stock that you're holding that sitting in your warehouse.

Evan 5:56

Warsha 5:57
Before it is sold and sent to the customers.

Evan 6:00
Yes so you have the logistics that go with it and how efficiently all the rest of it, which then leads nicely into the delivery cycle.

Warsha 6:06
Into the delivery cycle oh and the delivery cycle is key in a service business, and the delivery cycle is also important in a service business isn't it Evan?

Evan 6:17
Oh totally, now you know It's quite interesting, with a service business, depending on how you put that together, you can actually productise your business.

Warsha 6:25

Evan 6:26
So it's easier to work with. And it's not easy to understand the profitability of what you actually are producing.

Warsha 6:32
And that brings me to something that I was going to address right in the end, thank you for talking about this. Most service businesses think that we're selling a service not a product, and almost an equal number of businesses today actually productise their service.

Evan 6:47
Totally, it's not like a lawyer for example where you got the entire month get your timesheets together to work out who worked on what project, which client and that sort of stuff, put the invoice together, and then bill that's not exactly a service, although you might have retainer. That's why lawyers do that they prefund some of their work. But the point there is, they still have to work out who worked on what and work on their own internal efficiencies for common services they might.

Warsha 7:12
So, what you're talking about just now is a typical non productised service delivery.

Evan 7:16
Totally, totally.

Warsha 7:18
So, I am talking, what I said earlier was, it doesn't matter whether you're selling an actual physical product, or you're selling a service, if you productise your service you are still selling a product.

Evan 7:30

Warsha 7:31
So designing and pricing that product I know we're going into a slightly different curve over here, but the point of mentioning that point of addressing that is, every time somebody sells a service, please think of it as you're selling a product, it doesn't always have to be a physical item that you're selling, productise your service.

Evan 7:48
Because you know what's included all the rest of it so it's just easier to address as a product totally, totally.

Warsha 7:54
Okay. So, you have the delivery cycle. And yes, as you mentioned earlier, if it's a physical product you then have the logistics, to worry about because remember, until such time that a customer takes a product in their hand and hands over cash.

Evan 8:09
It's not over.

Warsha 8:10
It's not over. Even more so in a product, for example, which is sold through different channels, because the cash hasn't actually reached you as the actual business manufacturing it.

Evan 8:21
That's true.

Warsha 8:22
So there are several layers that need to be looked at into this. So even within the delivery cycle, there is a sub cycle involved in it.

Evan 8:30

Warsha 8:31
As recovering that cash.

Evan 8:32
Yeah absolutely, and then the last one, which is the one most businesses focus on is your billing and payment.

Warsha 8:39
Oh, the most important one you mean.

Evan 8:40
It is the most important, but that's the one that most of us are aware of. So, when you're looking at the profit and loss.

Warsha 8:46

Evan 8:47
Oh we've made a profit great, there's a certain amount of money outstanding so you've done your billing. And are you waiting for people to pay. So that's the one because it's now in front of you people are paying attention to it, forgetting that the delivery cycle, the manufacturing cycle and your sales cycle beforehand, that all suck cash. And then you bill and then eventually received cash back so that cycle that we're talking about.

Warsha 9:11
Very nice. So, what else can you talk about in the billing cycle Evan? What can you tell our listeners?

Evan 9:17
Well, there are several ways you can even shorten the payment or the time to get the money, and that's either through your terms, or maybe credit cards so, if you're okay with a little percentage going away in the collection, you will get your money sooner.

Warsha 9:31

Evan 9:32
So, again you shorten the payment cycle. You might ask for quicker payment terms from a big supplier, it might bill in advance for example, there's a whole bunch of little things that you can do to shorten the billing and payment cycle itself.

Warsha 9:45

Evan 9:46
But if somebody is paying late, have a conversation with them understand their payment cycle, understand if there's something that we could do better, that sort of thing but you have a conversation with them. Because at the end of the day, a good relationship will generally get a quicker payment.

Warsha 10:00
What you said earlier Evan, got me to put my coach's hat on, just for a few seconds. Find out more I talk to customers to see why there is a delay in payment. Led me straight into thinking why that is a great way also of finding out what's happening within your customers businesses, customers industry and the constraints in that industry. So not everybody delays payment by choice, usually there is a deeper reason for it.

Evan 10:29
That's true.

Warsha 10:30
So this is a great way into getting to know who your customer is and what the customers industry looks like?

Evan 10:36
Completely, yeah.

Warsha 10:37
And if this is a I know I digress. Just a little bit bear with me but this is a great way to seeing whether you have your customer, your own core customer identified right if this becomes a trend within that industry.

Evan 10:51

Warsha 10:52
And if that really is your customer, how can you service that customer better. And how do you amend your terms.

Evan 10:58

Warsha 10:59
I digress so back to the point.

Evan 11:00
You did and it's actually important, because if it's industry wide. That's one thing to address, if there's not industry board and it's just your customer. That's a different symptom.

Warsha 11:10
It is.

Evan 11:11
So, Warsha we've covered the four big levers, if you will, within the Cash Conversion Cycle. Are there any key things, key points that we want to take on board and ways to improve?

Warsha 11:22
So, one of the ways Evan is what you said earlier, is how do you shorten a cycle. So, there is potential for refining every process within, everybody's businesses, while someone might think I've got a great process everything is working, there is always potential for refining.

Evan 11:38
Totally yeah.

Warsha 11:40
So, how do you shorten a cycle, perhaps.

Evan 11:43

Warsha 11:44
How do you maybe cut some steps. So, as you go through the process to see how you can shorten the cycle, one of the things that also comes up is certain repetitive tasks that delay.

Evan 11:56
Yeah yeah yeah yeah

Warsha 11:57
A cycle or you might find that two people are probably doing the same thing.

Evan 12:01
Or maybe there's one person who's stuck and is the bottleneck.

Warsha 12:04
And that is a bottleneck so those are couple of great ways to do it. And the third one is also to see how can you automate something to remove human error.

Evan 12:15
Totally, so you are eliminating mistakes.

Warsha 12:17
You are eliminating mistakes as well like you were talking about earlier Evan. Send the invoices in time, or maybe even bill ahead so there's your subscription so if you accept payments online. People are actually paying you in advance or if it's not a subscription model that you run. When you use a system, and accounting system, or a plan.

Evan 12:36
Yeah yeah yeah.

Warsha 12:37
When you use an accounting system, invoices now can be generated automatically.

Evan 12:42
Totally yeah.

Warsha 12:43
And be sent out through that.

Evan 12:46
And if it's a service that's where we are talking about productising a service, because you know what it is every month everyone so you can bill yeah totally.

Warsha 12:51
So, oh hey, and as you're listening to this podcast, go through your own business and assess the cycles that exist over there, audit them and see, where can these cycles, be shortened, then how does cash flow or how and where does cash, get stuck in your business.

Evan 13:10
So, to sum up what are the three or four key areas, is to shorten cycles, as best you can. That includes auditing what you're doing, removing mistakes.

Warsha 13:22

Evan 13:23
Improving processes which includes you know tweaking your business model that sort of thing, which then leads to internal profitability of product lines.

Warsha 13:31
Oh very nice.

Evan 13:32
Labour efficiency that kind of thing. So, all of those things will help produce more cash. Also, get you to receive it quicker.

Warsha 13:40
Yes, very nicely summed up. And what's the point of all this Evan?

Evan 13:44
The point of this is cash is king.

Warsha 13:46
Cash is king and remember, if your business is growing. Or you are on the path of scaling up. What will you need first?

Evan 13:55
A plan I would like to think but also cash.

Warsha 13:57
Oh that's very well summed up Evan, because as a founder of a business, what is the one key thing to enable scaling your business.

Evan 14:06
Always cash totally you need cash in your bank account to be able to grow.

Warsha 14:11
And this can Cash Conversion Cycle helps you go audit your own business, in a way, where you know where the cash is stuck, which can be released, and made available for you to fund your business or your business growth.

Evan 14:24
Totally. And the point here is to grow organically, without getting unnecessary external funding sources. So, internally cash is coming in, that velocity is increased, and you can grow organically and efficiently. And you know, where all the levers are in your business. You really can hit the ground running. So, on that note that's your Cash Conversion Cycle. Remember, shortening and reducing where your cash gets stuck is the name of the game. Have a look at your business, come back and tell us how you went?

Warsha 14:54
And we would love to hear from you.

Evan 14:56
Totally totally.

Warsha 14:57
Have a wonderful rest of the day. And we'll catch you on our next show.

Evan 15:02
See ya.

Warsha 15:03
Bye for now.

Warsha 15:05
Hey hey hey, thanks for joining us and listening, right till the end.

Evan 15:10
Get on over to daretoscale.fm to subscribe and access show notes and transcriptions.

Warsha 15:15
Oh also, did you know that we have a Facebook page for our podcast listeners. Come join the conversations at daretoscale.fm/facebook.

Evan 15:27
Absolutely, oh and also remember to give us a five-star review so other entrepreneurs can find this podcast like you, and get value to scale forward their business.

Warsha 15:36
Fabulous, we will see you at our next show. Bye for now.

Evan 15:40


Meet your hosts:
Warsha Joshi and Evan Le Clus
We are business mentors and business owners operating out of the vibrant city of Dubai, UAE.
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