Meeting your core capital target means having two months of operating expenses in cash, after you have set aside money to pay your taxes and assuming that you have nothing drawn on your line of credit.
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If you’re growing 20% to 100% a year, view each quarter as if it were a year. That means possibly adjusting your strategy every 90 days.
We encourage management teams to set aside an hour or more each month to brainstorm ways to improve each of these cash cycle components. This is a powerful exercise to do with the broader middle-management team at a half- to full-day monthly management meeting. It will give everyone a better understanding of how cash flows through the business and how each function can contribute positively.
The point is to have someone pay attention to the accounts payable people!
Also specify a due date (May 31, for example) on the invoice rather than include the standard “due in 30 days.
Hitting the core capital target is one of the most rewarding accomplishments we have seen our clients achieve. It changes their thinking. It improves their profitability. They are not so cash-strapped that they have to give away margin.
To tackle the cash conversion cycle, start by reading “How Fast Can Your Company Afford to Grow?” a Harvard Business Review article by Neil C. Churchill and John W. Mullins.