10 Business Model Pivots to Improve Cash Flow

This article is a reprint of Wise Bread's contribution to OPEN Forum from American Express -- where small business owners can get advice from experts and share tips with each other.

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When someone tells me they want to start a business, and if they are open to a little advice, I usually say something like this: “I know you are good at what you do, and I’m sure your product or service will solve real needs in the market, but you need to know that business ownership is about a lot more than that. You’re going to need to become an expert in cash flow.” Cash flow needs to be one of the major influencing factors when developing the most effective business model in the early stages of any company.

For years we've been told that there is really only one constant in business model creation -- change. But recently there has a been a movement away from the word "change" and toward another word: "pivot". Pivot helps us focus on the critical decision points of testing, trying, tweaking, and sometimes overhauling the business model.

The underlying theme of a business model is to find the most scalable and repeatable way to offer your products and services, and there are many pivots that need to happen to maximize the life-blood, or cash flow, of the business. Here are the ten most common cash flow pivots I have seen deployed in the ever-pivoting world of business model creation, design, and implementation.

Pivot 1 - Master Marketing

Becoming a master of something takes time and experience. Marketing is all about pivots, testing and trying different things until the most effective methods are found. But all too often marketing chews up vital cash flow before anyone realizes the money was being wasted. If you master marketing, your marketing will generate more cash flow, not just use up the cash you started with.

Pivot 2 - Maximize CPA

No, I’m not talking about your tax CPA, I’m talking about Cost Per Acquisition, or the amount of money it costs you to acquire a new customer. Pivots that include reducing the CPA will help cash flow and contribute toward growth capital as well.

Pivot 3 - Invoice Timing & Terms

Invoice your customers as early as possible. For example, one company would charge their customers every month for the work they did the prior month. Through a few calculated pivots, they began invoicing their customers before they even started doing the work, buying them more than 30 days of extra cash flow. Don’t negotiate the terms. You set them, and your customers accept them. And if they go late, cut them off. A non-paying customer is more costly than no customer at all.

Pivot 4 - Invoice Frequency

How often do you charge customers? Is it predictable and does it bring the total amount the customer pays into a cost range that they perceive is acceptable? Are they incented to pay for several periods in advance?

Pivot 5 - Lean Inventory

Inventory on your shelves is cash not in your bank account. Any pivots that push inventory either up or down your supply chain will help your cash flow.

Pivot 6 - Variable Cost Reliance

Fixed costs make it difficult to pivot effectively. Building a business model around variable costs and pivoting to rely more upon them will help the cash flow of a start-up and growing business.

Pivot 7 - Subscription Structure

What is the lifetime value of a customer for your business, and what pivots can you make to enhance it? Business models with recurring, subscription-type pricing will generate the most short and long-term cash for your business. Almost every business can convert at least some of its products and/or services to a subscription pricing model, and banks and investors like to give money to steady cash flow businesses the most.

Pivot 8 - Recurring Contracts

Pivots that move customers toward contractual obligations to use your products and/or services for some period of time will drive the valuation of your business to its highest potential peak. The steady, predictable cash flow that comes from these contracts is the most attractive type of business in which a financial or strategic buyer would be interested.

Pivot 9 - Focus on Customers, not Products

All too often founders and inventors are infatuated with their product and not with understanding and solving the real problems of customers. Clay Christensen, Harvard Business School Professor, refers to this as knowing what job your customers hire your product or service to do for them. Peter Drucker wrote: “True marketing starts out…with the customer, his demographics, his realities, his needs, his values. It does not ask ‘What do you want to sell?’ It asks, ‘What does the customer want to buy?’” Pivot toward what customers want to buy and you’ll reach cash flow positive sooner than you may think.

Pivot 10 - Payment Options & Convenience

Any pivot in the business model that makes it more convenient or provides more options for your customers to pay you will help your cash flow. Your customers should never be given a chance to think about any inconvenience associated with paying you.

As you start and grow your business, look for opportunities to implement the cash-flow enhancing pivots mentioned above. If you do, you’ll improve your chances for long-term sustainability and become an expert in cash flow.