Cash flow cycles are typically reviewed as part of a business’s overall financial planning. Defined as measuring how long it takes for a company to recover the cash that it invests in ongoing operations, understanding the cash flow cycle of your business is an integral part to maintaining its financial health.
However, when examining and managing cash flow, business owners often don’t consider the company’s sales cycle. Sales cycles are the step-by-step processes that every business undergoes when selling a product to a customer and includes every phase necessary to close a deal – from the moment a customer is approached to the moment payment is in hand. As such, they are primarily seen as a marketing tool.
Since one document lives in the accounting department and one lives in the marketing department, few businesses think to put them together. But, the aha moment for business owners comes when the cash flow cycle is examined in conjunction with the sales cycle – similar to overlaying one graph on top of another to see how well they line up.
Looking at the two cycles together allows you to discover whether you have a cash flow gap. For example, if your sales cycle runs in six-month terms but your cash flow will only extend three months, then you have a financial problem.
There are several adjustments you can make to your business practices to fix this problem. They include moving up receivables, establishing advance billing or introducing progress payments. Each of these billing practice changes ensures that your cash continues to flow.
However, if your cash flow cycle and sales cycle don’t line up because your sales cycle is primarily seasonal, then by the nature of your business, the cash won’t flow as freely during the off-season. Billing practice changes won’t necessarily fix this problem.
In this case, aside from re-evaluating your staffing needs, consider creating neat and tidy cash flow services that can be pushed when you need to fill a gap. These types of services are low margin, intriguing to customers and easy for your business to complete quickly.
Creating a reliable cash flow is vital to the success of your business and by pairing it with your sales cycle, you’ll have a better understanding of the steps you need to take to manage your business’s financial health.