Cash Flow: Revenue (Actual)
July 6, 2009, 9:35 pm
Copyright © 2009 Integrated Profitability TM
This is the third in the “Cash Flow: Revenue” string of articles and the focus is on ideas to increase Cash Flow on a permanent basis. The first two articles covered temporary, timing ways to increase Cash Flow (“Cash Flow: Revenue (Timing)”) and the grey area between timing and actual improvements (“Cash Flow: Revenue (Grey Area)”).
As mentioned in “Cash Flow (Intro),” the only way to permanently improve Cash Flow over the long-haul is to widen the spread between Revenue and Expense (where both are on an “All-In,” net basis). As long as net-revenues (converted to cash) are increasing faster than net-expenses (paid in cash), the company’s cash flow is improving.
(Note: there are specific relative trends that can cause cash flow to behave counter-intuitively, but we’re going to ignore those for now and perhaps pick them up at a later time.)
How to increase revenue is an age-old question facing businesses, and the full topic is far beyond the scope of this article. While the thoughts below are limited specifically to the revenue side of the Cash Flow equation, the steps are very similar to those taken to increase sales and revenue overall. Here’s the first one:
● Sell more
This is obvious, of course. However, in order for cash flow to improve, the sum total of the marginal and variable costs associated with each new sale must be less than the price the customer pays. Assuming your company has the capacity to handle higher sales, you could look into new types of customers, new markets or new channels to sell your products and services.
Depending on your business’ product or service, you might be able to take advantage of “associate” programs wherein a widely distributed “sales forces” peddle your products to their networks for a commission. You must add the cost of that commission to your marginal costs in order to make sure that any additional sales are, in fact, increasing your cash flow. Going this route works well for certain types of products (e.g., electronic products) and much less well for others (e.g., fresh produce).
Investigate associate programs thoroughly to ensure that unanticipated “ripple effects” don’t adversely impact your business–for example, a surge in customer service calls, much higher than normal returns or the impact increased sales will have on the support functions inherent in your business (e.g., billing & collections, training). If you are already at 95% capacity across most of your processes (e.g., production, operations, fulfillment, customer service), a large increase in sales might not be the best situation for your company until capacity is expanded: bottlenecks could bruise your reputation and cause more damage to future growth than the surge is worth.
● Pre-Sell
Offer gift certificates. A great advantage here is that you make the sale today and there is a time-lag for the purchaser to give the certificate to another person, and then for that person to use it. On the other hand, there are additional expenses involved with running a gift certificate program, including keeping track of which ones have been issued, which have been redeemed and which are still outstanding. There is also the risk of counterfeits.
In the next Cash Flow – Revenue article: more approaches to improving the revenue side.
Bill
William A. Stong
Email: william.a.stong@gmail.com
SBF&P # 27
Copyright © 2009 Integrated Profitability TM
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