Cash Flow Management Lesson

Remember Hans Christian Anderson’s fairy tale “The Princess And The Pea” from your childhood? I think my Mom read it to me a hundred times.

The story goes…

A prince was searching the land far and wide for his future wife. He didn’t want a FAKE princess who only wanted his castle and his fortune. He wanted a REAL princess to share his life and have a positive impact on the future of the realm.

The prince figured out that he needed to test each candidate to see if he had found the real princess that could help him achieve his dreams.

He came up with a test, and for weeks on end he invited the candidates, one by one, to spend the weekend at his castle.

In the guest bedroom where the candidate would sleep, he piled something like a hundred mattresses on the bed. He placed one dried pea under the bottom mattress. He knew that only a real princess would be able to feel that pea under all those mattresses and that, being a princess, she would complain about her sleepless night.

Using this testing method, he found his true princess and the fairy tale had a happy ending.

It’s smart to test things out in your business too. Especially when it comes to doing things that affect your business cash flow.

If you have a nagging problem or worry about your business cash flow that keeps you from sleeping soundly at night, then here are some suggestions on a few ways you can test things out before making a financial decision.

Testing Your Marketing – Promotional Offers and Advertising Delivery Methods

The simplest way to test this is to compare promotional offers and using different media delivery vehicles, in terms of cost, effectiveness, and ROI. We’ll use a carpet cleaning business as a simple example:

The business owner compares some possible promotional offers:

  1. 10% off a carpet cleaning no minimum square footage
  2. One room cleaned free with a minimum job of X square footage
  3. $XX dollars off your total order over a certain dollar amount
  4. Free upholstery cleaning on one chair or loveseat with minimum job of X square footage of carpet cleaning – in hopes the chair or loveseat looks so good they’ll add on having the sofa cleaned at full price.

Here’s how he compares the elements of each offer:

  • The retail price at the promotional level, minus product and labor costs of delivery, minus commissions (if he uses commission sales reps), equals expected gross profit per job sold on this promotion.
  • Expected unit sales from promoting the offer X (multiplied by) the expected gross profit per job from “A” above equals total expected gross profit.
  • Expected total gross profit from “B” above minus media costs (postcard, newspaper, radio, etc.) equals expected net profit for that promotional offer using that media.

Now he decides to test the offer that appears to be able to deliver the most unit sales at the highest expected net profit and see how it performs.

Speeding Up Receivables Collections

Another thing you can test that can make a huge positive financial impact on your company’s cash flow is incentives to pay invoices faster if you invoice your customers after delivery and wait for them to pay you.

For example if you typically give the customer 30 days to pay the invoice, you could offer a 2% discount off an invoice at a certain minimum order if they pay within 10 days by check or credit card (note their check has to have arrived at your office within the 10 days), or you could offer a 3.0% discount if they agree to an immediate ACH draft on their checking account by you through your bank and straight into your checking account which settles overnight, again if their order meets your specified minimum.

There are all kinds of things you can test that can positively impact your bottom line profit. You’ve really got nothing to lose and a lot to gain by testing things out.