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Cash flow is the lifeblood of any business, and understanding it is crucial for all departments, including sales and marketing. Cash flow is the movement of money into and out of your business. It's a key indicator of your company's financial health and directly impacts its viability, profitability, and growth.
While at Dell, we famously ran our business with a negative Cash Conversion Cycle (CCC). That means that our customers paid us before we paid our suppliers. That business practice involved sales, marketing, supply chain, and finance collaboration.
As a result of the improved cash flow from a negative cash conversion cycle, the company could avoid external financing, improve liquidity, and gain a significant advantage over competitors by accelerating investment for growth.
To grasp the importance of cash flow, let's look at the concept from a typical sales cycle perspective. When you make a sale, the business incurs various costs, such as the cost of goods sold (COGS), marketing expenses, sales commissions, and operational overhead. The profit from the sale is what's left after all these expenses are deducted from the revenue. The timing of when these costs are incurred and when the revenue is collected is critical to what drives cash flow. Margin also contributes to the profit generated and adds to overall cash flow.
Positive cash flow means the business has more cash coming in from sales than going out in expenses, which leads to a healthy business. Conversely, negative cash flow indicates the business is spending more money than it's receiving, which could lead to financial distress if not corrected promptly.
As salespeople, you are frontline revenue generators for your company. The relationship between sales and cash flow is direct: as sales increase, so does the cash inflow, assuming clients pay their invoices on time. However, understanding the impact of payment terms and sales return policies on cash flow is crucial.
For example, if your company operates on a 30-day payment term, there's a lag between when you make a sale and when you receive the money. A 90-day payment term, in comparison, comes at a higher cost. Optimally, when forced into a longer payment term, prices should increase. This is where handling objections and negotiating skills come to play.
Certain businesses have a long implementation period where an invoice is not generated (or revenue recognized) until the customer accepts the product or system. Finding ways of accelerating acceptance can be a crucial factor for cash flow. Many companies utilize a metric of "time to implement or "order to invoice."
Additionally, returns and refunds can also impact cash flow. While you strive for a flawless sales process, returns are a part of doing business. However, reducing returns by better matching proposals to customer needs impacts cash flow. This is also the case for e-commerce and making the product description as straightforward as possible.
I won't detail the margin because I could write a book on that. Let's just say that discounting is an investment. Use it wisely.
Marketing teams play an equally crucial role in managing cash flow. Marketing expenses often account for a significant portion of a company's budget, and the timing and management of these expenses can directly impact cash flow.
Managing your product mix plays a role in cash flow. Most product managers will avoid implementing a campaign with low inventory. Equally important is to promote products that are overstocked, and this is where the supply chain and marketing need to collaborate.
Marketing campaigns often require spending money upfront with the expectation of generating sales in the future. However, if the return on investment (ROI) isn't calculated correctly, or if sales don't materialize as expected, this can lead to a negative cash flow.
Sales forecasting is a critical tool for managing cash flow. It involves estimating the amount of cash and product that will come in and go out of the business over a certain period. This projection helps in planning and ensures sufficient funds to cover expenses, investments, and production schedules.
In numerous industries, the elasticity of demand manifests in such a way that product unavailability often leads to a significant decrease in the quantity sold.
Elasticity arises when customers are unwilling to wait for you to deliver a product or service, influencing customer behavior. This can be noticed by measuring abandoned carts or simply the sales decline when a product is unavailable to ship or has a longer delivery time. Just to remind you, no availability means no sale or cash to cover expenses.
Balancing product availability for elastic demand products with reduced inventory requires a closely managed forecast and timely updates.
You play a crucial role in this process as a sales or marketing professional. Your sales forecasts and marketing budget estimates feed into the overall cash flow forecast and impact product availability. Hence, the accuracy and realism of your projections are essential to effective cash flow management.
There are several strategies that sales and marketing teams can employ to improve cash flow. Shortening the sales cycle and negotiating better payment terms with customers can lead to quick cash inflows for sales teams. A robust follow-up process for overdue invoices can also ensure more timely payments. The review of standard terms and conditions is also an action that can make an impact. Price negotiations are an investment. Wise discounting usage is vital without giving away the hidden discount of longer payment terms.
Managing product mix and driving campaigns to eliminate overstock is also an action that can be taken continuously. Extra care given to forecasting products with higher elasticity based on critical supply can ensure that sales are not lost due to lacking inventory.
For marketing teams, aligning spending with revenue generation is critical. Invest in high ROI activities and regularly measure the outcomes. Leverage cost-effective digital marketing strategies to maximize returns.
Understanding and managing cash flow is more than just the job of finance or accounting teams. As integral parts of the business, sales and marketing teams play crucial roles in cash flow management.
Cash flow management should be baked into your company's DNA.
Effective cash flow management means being able to be more competitive. Accurate sales forecasts, effective collection strategies, responsible spending, and high-ROI marketing strategies can significantly improve cash flow and contribute to the company's financial health. Remember, a company's cash flow strength is a collective responsibility, and your contributions make a significant difference.