I want to talk about the cashflow conundrum. Here’s the cashflow conundrum.  Very often a business owner and MSP owner will look at their profit and loss statement, their income statement, and it’ll look like their business is profitable. Awesome, right?

The business is profitable, but they’re running out of cash. So they’re seeing their bank balance go down. But their revenue and profitability go up. Why is that happening?

It’s something that we call the cash conversion cycle. The cash conversion cycle looks something like this.   If I generate revenue from selling a service, but I don’t collect the revenue on that service for 30 or 45 days, I’ve recognized that revenue in my income statement, but I’m not going to see the cash for 30 to 45 days. Now, that may or may not be a good or bad thing. But it’s worth knowing it. Why?

Because now I have a bunch of expenses too. And if I’m paying my expenses on time, because I want to pay my vendors timely, I’m paying my expenses, say every 15 days.  But I’m only collecting cash every 30 or 45 days, I’m gonna squeeze my cash availability.  I might be growing but I’m not going to have cash in the bank to fund growth, people, systems innovation.

So it’s really important that you pay attention to what we call the cash flow statement. And the cash flow statement is designed to make that adjustment so that it reconciles what you see as profitability in your income statement to how much cash in that period you’re actually collecting.

And when you can get a good handle around that cash conversion cycle, you can start to pull some levers to compress that. So billing in advance, billing on ACH, not having to send out invoices, because you’re on a managed service upfront billing fee arrangement.

And so there are some ways to compress that cash conversion cycle. Get more comfortable with your cash availability, and most important, start putting it to use for growth. Thanks. Talk to you soon.