Article Summary:Effective management means shifting money, time, talent and energy into the things that increase cash flow.
Stepping aside from the myriad of current accounting practices that confuse people as to what constitutes the actual operating income in an organization, let's define cash flow as the difference between all the money that is spent by the members of an organization and all of the money that flows into an organization. (Gosh, that seems simple, doesn't it?)
Your goal is to constantly increase positive cash flow. That is, get more coming in than is going out.
Before diving into an explanation on how to do that, let's remove one business myth. That is, the fallacy that you can increase cash flow by decreasing costs. The proper way to say that is to say, "We will increase cash flow by spending less on things that are not effective in building our business." A very common comment that I hear these days is, "We cannot add more to our G&A (General and Administrative) spending." That is completely ridiculous because it lumps every expenditure, every dollar for salaries, travel, product/service development, customer service, etc., into some giant pie called "G&A." It is an indiscriminate way of thinking. Not every G&A dollar has the same value. Some money spent helps to increase positive cash flow and some money spent actually decreases positive cash flow. The key is to clarify what you are spending money on: a cash flow generator or a cash flow destroyer.
The basic functions of any business include the following:
- Identify the customer or the desired customer (The cash paying customer, not an internal person within your organization).
- Identify what that person wants to achieve.
- Identify what would constitute value to that person.
- Decide how your organization will create that value.
- Decide how your organization will deliver that value.
- Decide how your organization will let the person know that you have this value available for them.
- Decide how you will sell this value to the customer.
- Decide whom your organization will hire and develop to fulfill the previous seven steps.
Bingo. You now have the basic structure of any business: a potential customer and an understanding of what they want or need, a product or service to sell, a way of getting the product or service to the customer, a way to market and sell the product or service, and an understanding of whom to hire and where to place them.
Notice these eight steps all cost money. None of them generate money. Even the sales function is a cost. You have to pay your salespeople. Everything in your business costs money. However, there are a lot of other things that people in your organization spend money on that do not fall in one of these eight categories. (i.e. extravagant travel, advertising that confuses the prospect, meetings that do not add value to customers, time wasted studying the daily stock price and worrying about what will happen tomorrow, etc.). The absolute key to effective spending is to make sure that it falls within one of these eight areas and constantly improves the impact of that area on the key business results. That is, to constantly improve the understanding of your customer's needs and wants, the value that your organization has to offer, the delivery of that value, the marketing and selling of that value, and the people who create and deliver that value. While all of this costs money, the better job you do of it, the better your chances are of converting a prospect into a customer.
The one and only thing that generates income for your organization is a person who decides to spend money to buy your product or service. That's it. Consequently, you increase positive cash flow by creating greater relevant value for your customer and improving the system for marketing, selling and delivering that value (and, of course, charging for that increased value).
Wal-Mart and IBM are two classic examples of this extremely focused approach to spending money, increasing value and generating greater cash flow.
When the rest of the retail industry was flailing around in 2001, Wal-Mart increased its revenues and operating income. How? By focusing all of their investments of time, talent, energy and money on delivering the value that its customers wanted. They kept finding ways to lower their prices and work more efficiently. IBM completely shifted their time, talent, energy and money toward services and supporting customers. This shift cost G&A, but it also will increase positive cash flow.
STEPS TO IMPROVEMENT
- Look at where the members of your group spend money.
- Identify which expenditures fall into the eight key areas I listed above.
- Identify which expenditures don't fall into these eight areas.
Then shift the money, time, talent and energy toward the things that will matter the most and away from the things that will matter the least. This might mean you will spend more money, the same amount of money or less money than you are spending right now. Remember: the goal is to increase cash flow, not simply decrease G&A spending.
As a consultant and professional speaker, Dan Coughlin works with executives and entrepreneurs to accelerate their critical business outcomes. His clients include McDonald's, Coca-Cola, Marriott, Citigroup, St. Louis Cardinals, SBC Communications, Auxeris Therapeutics, Fru-Con, McCarthy Construction and more than 70 other organizations. He specializes in leadership, management, teamwork, innovation, branding and strategy. He has more than 100 free articles on his website, www.thecoughlin company.com.