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 result in a catastrophe. It almost did for technology giant Dell back in the '90s. 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 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 expand the business.
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 acquirers do not need to commit their capital to funding day-to-day operations, and 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 up front 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 up front, the client commits to participating in the process, and we commit to providing value and delivering on the trust they have placed in us.”
Are you wondering how he gets away with it? “We have a clear, staged process that outlines how we operate and what a client receives,” Mr. Slater explains. “The fees for each stage are right on our Web site, 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.”
Charge up front and your company will be worth more when you go to sell—and more fun to run in the interim.
Special to the Globe and Mail
John Warrillow is an entrepreneur, author and speaker who has started and exited four companies. He most recently transformed Warrillow & Co. from a boutique consultancy into a recurring revenue model subscription business, which he sold to the Corporate Executive Board in 2008. He is the author of Drilling for Gold (Wiley, New York 2002), and in 2008 he was recognized by BtoB Magazine's “Who's Who” list as one of America's most influential business-to-business marketers. Mr. Warrillow is currently working on his next book, Built To Sell: Turn Your Business Into One You Can Sell , due for release on Feb. 1, 2010.
