Every business has a Revenue Cycle (RC) which is unique to their business and sometimes industry. It starts the moment a business makes contract with a prospective buyer through to completion of the transaction and payment received.

It is crucial every business understands their RC, the steps involved and how long each step takes. Many businesses today make a profit but struggle with cash flow. What does a business normally do when cash is tight? The accounts team gets on the phone and chases their debtors to pay the money they owe. That is fine, but I argue there are numerous other strategies which could have been implemented beforehand which make positive difference to a business’s cash flow.

A supermarket has one of the best RC’s. The buyer walks into a supermarket, gets what they need, there is very little interaction with the buyer, the supermarket doesn’t use many resources to service the buyer (expect checkout operators) and the buyer pays immediately. No debtors and the cycle takes anywhere between five minutes and one hour.

The other extreme is a builder. This requires significant interaction with the prospective buyer before they purchase, if they purchase at all. If the buyer decides to build there is significant time between commencement and completion (six months to over a year potentially). Builders usually receive progress payments from the buyer which helps cash flow but the time length and level of interaction required during the RC has a significant impact on cash flow and profitability.

How do you improve your businesses RC? It involves three tasks, firstly identify the steps and interactions occurring in your RC. Your business may have multiple RC’s depending on the different products and services you offer. Secondly, quantify how long each step takes on average. A step could take 10 minutes (supermarket) or 10 weeks (builder).

The last step is to get creative. A builder had a 122 day RC and asked his team to get to seven days, they said it was impossible. They brainstormed, came up with a plan and they were right, they couldn’t get to seven days but they got it down to 28!

Here are some ideas to get you and your team moving:

  • How can we get buyer approval quicker?
  • How can we need to improve the quality of our leads?
  • Are we invoicing as soon as possible or can we invoice sooner?
  • What stops a job getting “finished”?
  • Have buyers make upfront, deposit or progress payments?
  • Can we improve our processes to reduce work-in-progress?
  • What section/s of the business slow down the RC?
  • Can processes be done “side-by-side”? Eg having multiple people working on a job to finish it quicker.
  • Can we standardise processes to reduce repetitive road blocks or enhance existing processes?

There is no finish line or silver bullet when it comes to RC improvement, it should be a constant focus in your business. Get buy in from your entire organisation and you will see the cash flow grow!



About the writer:

Brendan Mills is a CPA with 10 years’ of experience working with small, medium size businesses helping them improve their performance. He believes the skills required to understand and benefit from financial information are learnable for every business owner and his vision is to share this knowledge with the business world.

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