A Formula to Keep Cash Flowing and Your Cash Cows Milked
Among the top ten issues keeping US business leaders awake at night are failure to innovate and/or meet customer demand – and cash flow which is critical to businesses’ survival and success.
We’ve heard from top accountant Steve Pipe why family businesses and owner managers cannot rely solely on reams of traditional management accounts to drive the business forward – which is why they also set and measure Key Performance Indicators (KPIs).
As an experienced business strategist and executive coach, boosting the profitability UK and US companies, I know that one of the first steps to managing cash-flow is establishing which customers are the most profitable.
The Boston Matrix, developed in the early 1970s, is a great way of seeing how your clients affect your business and your cash flow.
The matrix divides your customers into four types: the dogs, the question marks (also known as “problem children”), the cash cows and the rising stars:
The dogs are a negative influence on your business. They are the ones that take forever and a day to pay, complain about everything and are voracious consumers of your time and energy. They are, in short, emotional and financial vampires, wasting your resources. You need to get rid of them.
The question marks (problem children) are the clients who always want more – bigger discounts and additional services – but they are unwilling to pay increased charges. These require consideration. There is a chance they may become a rising star, but most likely they will deteriorate and become dogs, absorbing a lot of effort with little return. Consider each of them carefully and, again, get rid of them if they continue to drain your time and money.
The cash cows are your established customers. They are little trouble. You have productive, profitable relationships with this group and those established relationships may make it easier to exploit new, appropriate, opportunities should they arise.
The rising stars are customers who are still small, but are likely to grow and become profitable. There are a lot of great opportunities within this group and they should go on to become cash cows of the future. However, for a lot of businesses, the rising stars may be ignored because their attention is taken up with the problem children and the dogs. Pay them the attention now, so they can return that investment in the future.
If you’re worried about what will happen to your cash flow if a customer leaves, keep in mind the golden rule – aim to have no more than 12 per cent of your business invested in an individual customer – so that, even if your biggest customer decides to leave, you are still in a strong position to carry on creating cash cows from your rising stars.
For help identifying your rising stars and cash cows, or to share your cash-flow tips, leave a comment below, e-mail firstname.lastname@example.org, follow @richardwhatif on Twitter, connect with me on LinkedIn or post on www.whatifforums.com.