Accelerate Business Group, LLC

This is the second post in a series on the six most common cash flow challenges.  In this post I address the challenge of solving a cash flow problem with new customers.

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At a high level there are only two ways to fix a cash flow problem - bring more money into your business or cut the amount of money leaving.  Of these two options, cutting expenses has some real limitations.  You can cut once, sometimes twice, but you can't continue to cut expenses month-after-month - eventually you'll cut yourself to non-existence.  There is a reason cost cutting is commonly referred to as death by a 1000s cuts.

That's not to say businesses shouldn't cut expenses, they should.  Prudent managers, business leaders, investors, and stakeholders expect operations to run lean.  Expense management maximizes profitability.

Expense cutting is a stopgap action that can have an immediate positive effect on cash flow, but can cause some serious problems in the future and compound a cash flow problem.  You should minimize expenses as a normal course of ongoing business and cut them judiciously in response to a cash flow crisis.  I'll address this topic in a later post in this series.

Assuming ongoing and effective expense management, cash flow problems are best fixed with revenue increases and the escalation of account receivables.  For most people this means a sense of urgency to get more new customers.  But it shouldn't - it should mean something much more.

Boosting revenue to address a cash flow problem is best thought of from the perspective of where new money can come from.  There are only three ways a business can increase revenue:

• Get more new customers
• Increase the value of your average sale
• Increase the rate and frequency of repeat buyers

There are countless books written on how to find new customers.  If fact, there are so many books, websites, and authorities speaking to identifying, attracting, and winning new customers that I'm not going to add much to it in this series.  Instead, I'd like to offer a different thought on wining new customers to fix a cash flow problem - viability.

While there's no argument against the need for new customers to solve a cash flow problem, there are realities to factor into the discussion:

Root cause of cash flow problem - Are you sure your volume of new customers is the root problem of your cash flow woes?  For many companies, it isn't.  I've worked with more than one company who approached me in desperate need of a lead generation campaign to boost sales only to discover the rate and volume of new business is good, but churn is unacceptably high -or- the average transaction size and margins are unnecessarily low.  A good analogy is asking for a larger pipe to pump water into a holding tank to fill it faster than the hole that's draining it.  For many companies, a better long term solution is to plug the hole that's draining the tank.

Time to cash - It's one thing to make a sale, it's another to have money available to spend.  When looking at new customers to solve a cash flow problem, be sure to factor in time for lead generation, your sales cycle, your customer's purchase cycle, production, delivery (if applicable), accounts payable, and your customer's payment process. 

Looking at every element necessary to find a new customer, sell them something, deliver, and receive payment, you may conclude finding new customers won't help in the time-frame you're dealing with.
It may be best to look at new customers strictly as a long term solution to avoid future cash crunches.

Cost of sale - What is it going to cost to quickly get a new customer?  Cost in this case doesn't mean the cost of sale built into your pricing, but the incentives you may have to offer to encourage a buyer to act quickly - discounts, 2 for 1, etc.  If your underlying cash flow problem is low margins, financial incentives aren't a good idea.

When using financial incentives to motivate a new customer to purchase, be sure to include a reason for the offer and set a deadline to act.  Reasons may include:

• Celebration
• Anniversary
• Product or service launch
• New release of a product or service

You want to offer a reason for your incentive to protect yourself later.  For example, if you offer a discount because of an anniversary, there's an expectation the discount will disappear after a period of time.  The deadline to act is further leverage to create urgency.

Consistency - What is special about a special that is offered every month?  Nothing.  Yet this is what some companies do month after month in attempt to increase revenue.  What results is prospective customers learn your list price is artificial and there's no urgency to act - they can get the discount any time they want it.  What happens over time is your ability to motivate new business and create a spike in revenue is diminished.

Risk- Discounting your product or service to drive new sales can be effective in creating a spike in revenue, easing a near-term cash flow problem.  But you you need to weigh the risk to future revenue.  For example, if you discount a year's worth of service to get cash now, be sure you understand how doing so will affect future revenue and cash flow.  You don't want to create a bigger problem in the future - reducing margins for a year and not having a customer you can effectively sell to for months - due to an incentive you offered to spike revenue.

Be sure you understand how a financial incentive affects your business months down the road before you offer one.

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Solving a cash flow problem with a strategy to get more new customers is prudent, but possibly foolish at the same time.  The prudent part is an abundant,  steady, and predictable supply of new customers is the ultimate fix to a cash flow problem.  The foolish part is if you don't already have an abundant,  steady, and predictable supply of customers sufficient to avoid a cash flow problem, the odds are against you quickly creating that supply.  Worse, it may lead you to offer discounts, giveaways, and act in desperate ways that compound your cash flow problems.

A better strategy for many companies to fix a cash flow problem via a revenue increase is to pursue repeat business or an increase in their average transaction value.  I'll address both in the next post in this series.

Here's a link to all posts in this series:

Best practices in cash flow management - the series