Best Practices for Successful Companies: Control Your Cash

Posted by Chuck Kocher
On October 11, 2011

We often spend a lot of time talking about growing our companies. After all, things are fun, interesting, and exciting when you’re growing. But companies need certain things in order to grow. And one of the crucial elements that fuels growth is cash.

That probably doesn’t surprise you, but often businesses treat cash as an afterthought—and that’s dangerous. The first law of entrepreneurial gravity states that, “Growth sucks cash.” If you’re growing, you’re going to burn through money. Learning to manage your cash is critical to your continued success.

That’s why I encourage businesses to calculate their Cash Conversion Cycle (CCC).  What your CCC does is measure how long it takes between when you spend a dollar (on marketing, design, rent, wages, etc.) until you get that dollar back. And that calculation is a company-wide calculation.

Why is that so important?

In their early days, it was taking Dell 63 days to complete their CCC (time between spending a dollar and earning it back). That was too much time for a growing company and they almost ran out of cash. A determined effort brought things back under control to the point where they are running at minus 35 days. They’re now generating more cash the faster they grow—and their bank account proves it.

Any growth company can take control of their cash flow.  They may not turn it around as dramatically as Dell did, but by paying attention to it, they can improve their situation and ensure that they have sufficient internal cash to fuel their growth.

How can you take control of your cash? One resource I’d recommend is Neil Churchill’s well-known Harvard Business Review article: “How Fast Can Your Company Grow?” that offers formulas for calculating your cash conversion cycle.

I’d like to offer you another tool that outlines the cash cycle and can help you work through concrete ways to double your operating cash flow in the next 12 months. Drop me a note if you’d like this free one-page cash tool! Take control of your cash!