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Why cashflow problems are the butterfly effect in your business

Sep 24, 2012, business ~ sales

"Cashflow is the killer" - that's what they say.

Sometimes bad cashflow causes problems you'd not even expect. It's like the butterfly effect. I discovered this whilst trying to solve a current business problem for my own business tonight.

So, our current problem is this. New projects are taking more time and effort "land" than usual.

This doesn't sound like a cashflow problem. But it is.

Symptoms

To identify this, I listed out the symptoms we're experiencing:

  • Lots of enquiries have come through. Great. We have a pipeline of potential sales
  • About 30% of these enquiries are highly desirable companies to work for. Great.
  • Proposals are taking longer to create than usual. Booo.
  • I'm giving a lot of free consultancy to potential clients in order to win trust. Hmmm.
  • One of our key projects is delayed, so we can't start. Hmmm.

Cause and Effect

So, I was scribbling out some cause and effect. I started out with these assumptions:

  • High quality proposals increase the time to land a project (to get an agreed purchase order)
  • Quoting projects that aren't a good fit for your company takes longer, which in turn slows down the time it takes to land the project
  • Giving away free consultancy slows down landing the project. Well, to a point. You have to build trust. But ultimately why would the customer rush to start the project if they're making some progress for free?
  • Working with more potential customers dilutes your time, which results in a slower turnaround on proposals, which delays landing the project

So, the question is. Why would anyone...

  1. begin to quote projects that are a bad fit?
  2. give away hours upon hours for free?
  3. work on tons of proposals at once without setting customer expectations for a delay?

After more scribbling and thinking, I realised the answer is. Drum roll....

Sales Pressure == Bad Cashflow

I found this when I started thinking about the rest of the business to answer these questions.

I decided I was quoting bad projects, giving away consultancy, and overloading myself for one main reason.

Sales Pressure. Basically, we need to sell in order to achieve a good cashflow.

But then I realised that my company is owed enough money to keep going for months. So it's not Sales Pressure that's the problem, it's Late Payments that are creating the sales pressure.

Causal Loop Diagrams - a good thinking tool

Here's a causal loop diagram I sketched whilst exploring the problem.

causal loop

What to do next?

So, what do do about that?

Well, I decided on the following course of actions...

  • Chase payments more aggressively (chasing, threats and penalties are the key options here)
  • Set client expectations for delayed turnaround time on their proposals
  • Ask clients to pay for further consultancy
  • For non-optimal projects, send out slightly less detailed proposals
  • Chase payments again :)

This would solve the cashflow problem, set client expectations, and divert unwanted business elsewhere.

Sell like you have £1,000,000 in the bank

That is an old saying. But something rings true in it. It's easier to sell effectively if you pretend there are no business pressures. For example, you won't make acts of desperation (like giving away valuable time), you won't take on projects you don't want, you won't waste time on proposals for projects you don't want, and you will confidently lead the client to success, rather than letting them take the reins.

I'll let you know how it pans out.

Summary

  • Businesses suffer from the butterfly effect. Problems in one area of the business subtly ripple through to other areas. They're not always easy to spot.
  • Sales pressure makes it easy to make bad decisions about your business.
  • Cashflow problems can cause sales pressure.
  • It makes it easy to say "Yes" too often. To take on too much work. To give away free time out of desperation to gain trust and land business.
  • Causal loop diagrams are a good tool for focusing the mind and exploring issues
  • It's best to pretend you have £1,000,000 in the bank when selling, but easier said than done.
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