This article originally appeared in Forbes.
One important thing that every entrepreneur and leader must know: the cash needs of their business.
I learned an invaluable lesson on cash management when the company I founded, NationLink Wireless, nearly went out of business. But through an almost fanatical attention to monitoring cash inflow and outflows, our company was producing four times the gross margin in the industry when we sold it in 2011.
Building a business requires cash, and cash needs intensify when growth is accelerating. But companies often fail because leaders at the top did not properly manage the money flowing into and out of the business. New small businesses don’t survive very long throughout the years, according to research from the Bureau of Labor Statistics. Research from CB Insights shows that 29% of new businesses failed because they ran out of cash. Similarly, data from Guidant Financial shows that the No. 1 challenge for 33% of small business owners is lack of capital/cash flow.
A company’s cash conversion cycle — the time it takes for a dollar spent to make its way back to into your bank account — is one of the most important metrics to monitor while your business is growing. Small businesses typically have only 27 days of cash to pay the bills, which doesn’t provide much buffer when times get tough.
I refer to Verne Harnish’s book, Scaling Up: How a Few Companies Make It…and Why the Rest Don’t, a lot in my articles and speaking engagements. (Disclosure: I’m currently working with Verne to write a series of e-books.) He has provided sound guidelines for what areas to focus on in a business, covering everything from core values to meetings. And his chapter on how to accelerate cash flow is particularly helpful for business leaders who are not well-versed in accounting or finance.
Managing cash requires keen attention to detail, but if you follow these tips, you’ll see your company’s bank account grow. Here’s how you do it:
Most companies see vendors as numbers. If that’s happening at your company, change the relationship, and turn it into a true partnership, especially with vendors who provide essential products or services. Those vendors are subject matter experts, so tap into that wealth of knowledge. Hold separate meetings at your company with vendors, and ask them for their input on how they believe they can help your company be more efficient.
The quicker you produce and deliver a product or service, the quicker you get paid. But when was the last time you had an in-depth discussion with your team about production and delivery cycles? Those team members can help you find ways to speed up the process. Too many leaders treat their production teams like work crews on assembly lines. Your team was hired for a reason (skills, expertise), so take advantage of their unique talents and get their points of view.
The bottom line is that successful companies know how to maximize their cash conversion cycle. By following these tips and developing the right habits, you will be in a better financial position to grow your company.