By Roger La Salle
The tightening of credit markets has made running prosperous enterprises' even more difficult, and while some 'wring their hands' and lament the good' old day of plentiful credit, how many people are looking at their business' cycle time as an alternative to extended credit or increased overdrafts?
Cycle time is best defined as “the total time in business it takes' from receipt of an order until payment is received and banked”' © RLS 2006. In many businesses the cycle time is typically 90' days. In some cases it is much longer. For complex projects payment can' be staggered over many years and final payments are often withheld' for a guarantee period, extending even further the total cycle time.
Some businesses have a negative cycle time; that is the money is' received and banked even before the goods or services are delivered.' Airline tickets or pre-paid phone cards are typically negative cycle time' businesses, so too are on-line sellers such as Amazon. Indeed in the' latter case there is not even a need to have expensive infrastructure,' such as in the case of a telco or an airline. Amazon as a business' needed nothing more than a PC and a web site as its investments to' get started and create a highly successful negative cycle time business.
It is important, especially in smaller businesses, to understand the' influence cycle time can have on success, or perhaps failure. Indeed' there are many stories of business that have failed because they grew' too fast and were unable to provide the finance to support' that growth.
In simplistic terms, if a business is shipping $100K per month and is' operating on a three month cycle time, a minimum of $300k is needed' to finance the business. Banks, especially these days, are loath to' finance businesses against orders, but rather look for bricks and mortar' assets as collateral. If suddenly the business starts shipping $200k per' month with the same cycle time, $600k is needed as working capital. If' that is not available, then foreclosure may be staring you in the face.
However, if the same business can reduce its cycle time to just 1.5' months, then sales of $200k can be supported with the same initial' equity base. That's how important cycle time is, but unfortunately this is' often overlooked.
Doubtless the greater part of cycle time is the delay in customers' paying their debts.
While we can push for deposits, short term financing or even early' payment incentives, we should not ignore the inbuilt delays inherent in' our own internal processes. If these can be identified and rectified any' reduction in cycle time will be immediately seen on the bottom line as' pure profit.
Some businesses look to factoring their debts. This means taking a' short-term loan for the period of financial stress, but in many cases the' interest charged is sufficient to wipe out any potential profits. Factoring' does have its place, but look closely at the costs before seeing this as a' panacea. Yet another means is to offer discounts for early payment.
The above options may improve cash flow somewhat, but at a cost.
A better solution to gaining a partial reduction in cycle time is to' take immediate deposits on a customer's placement of an order.' Deposits from customers are seldom seen as your ploy to gain some' payment a little earlier, but more likely embraced by many as a means' to secure their place in your delivery queue, and thus they are not' viewed negatively.
The best solution is to analyse your entire business cycle time.' Dissect the business into its serial components, from receipt of an' order to shipment and debt collection and look for ways cycle time' can be reduced.
Process Innovation is one way of investigating cycle time in a' systematic manner. It is quite amazing what effect small changes to' processes can have in delivering real cycle time reductions and any gains' made here go straight to the bottom line as profit.
Process Innovation applied to the cycle time reduction should be seen' as a means to reap hidden profits from transactions that may otherwise' cost real money. Dissect and analyse your business, there is always room' for improvement.
Roger La Salle, is the creator of the "Matrix Thinking"™' technique and is a widely sought after as an' international speaker on Innovation, Opportunity and' business development. www.matrixthinking.com
