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?
What is “cycle time?”. It is best defined as “the total time in business it takes from receipt of an order until payment is received and banked”. 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.
Negative 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 prepaid 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.
The Difference Between Success or Failure
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 $100,000 per month and is operating on a three-month cycle time, a minimum of $300,000 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 $200,000 per month with the same cycle time, now $600,000 is needed as working capital, and 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 $200,000 can be supported with the same initial equity base. That’s how important cycle time is; but unfortunately, this is often overlooked.
Customers are Slow to Pay
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.
So, what’s the solution?
Some businesses look to “factoring” their debts. This essentially 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. Thus, while factoring does have a place, look closely at the costs before seeing this as a panacea. Yet another means is to offer discounts for early payment.
Unfortunately, while both of the above may improve cash flow somewhat, they come at a cost.
A better solution to gaining a partial reduction in cycle time is to the 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. This is best done by dissecting the business into its serial components from receipt of an order, to shipment, and debt collection and to 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, pure and simple.
What’s the message?
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.
About the author
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. He is the author of three books, director and former CEO of the Innovation Centre of Victoria (INNOVIC) as well as a number of companies both in Australian and overseas. He has been responsible for a number of successful technology startups and in 2004 was a regular panelist on the ABC New Inventors TV program. In 2005, he was appointed to the "Chair of Innovation" at “The Queens University" in Belfast. Matrix Thinking is now used in more than 26 countries. For more information, visit www.matrixthinking.com.