Your business will need a lot of cash if you’re paying for stuff before you sell it. If you’re growing fast, this negative cash flow cycle can cause a catastrophe. It almost did for technology giant Dell back in the ’90s.
Verne Harnish explained to me how Dell used to inventory parts and pay suppliers for the gear they kept on hand to make computers when customers called. The company ran short of cash and almost choked on its own growth. Galvanized by the near-death experience, Michael Dell himself set out to remake his company’s cash flow by charging customers before buying the bits and bobs needed to build the computers they ordered. By reversing the typical cash cycle, he was able to use his customers’ money to fuel his growth, which meant he required very little external money to grow the business.
Positive cash flow cycle businesses are more fun to run — and their also way more valuable. If you would like to sell your business one day, you’ll get more for it if you have a positive cash flow cycle. Positive cash flow businesses are worth more because:
1.) acquirers do not need to commit their capital to funding their day-to-day operations and;
2.) the bottom line is fatter because positive cash flow businesses do not incur financing expenses and they often have some investment income to juice the revenue line.
Highspot is a small, Toronto-based publishing consulting company that charges upfront for everything it does. Co-founder Ross Slater explains the company’s payment policy:
“In the beginning, the cash flow helped us get started without a lot of financing. Now we see prepayment as a mutual commitment to the success of the relationship we’re creating with our clients. By paying upfront, the client commits to participating in the process, and we commit to providing value and delivering on the trust they have placed in us.”
Wonder how he gets away with it? Slater explains,
“We have a clear, staged process that outlines how we operate and what a client receives. The fees for each stage are right on our website, which filters out the tire-kickers. We invoice immediately, then do what we say we’re going to do. We insist that this is the way we do business. We’ll walk away from a situation where a potential client won’t agree.”
Watch the short video below where I explain the cash flow positive model. When you charge upfront, your company will be worth more when you go to sell — and more fun to run in the interim.