Low-code tools are going mainstream
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Multilingual NLP will grow
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Combining supervised and unsupervised machine learning methods
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Automating customer service: Tagging tickets and new era of chatbots
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Detecting fake news and cyber-bullying
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The best businesses pay you to operate them.
I'm talking about negative cashflow conversion cycle.
The beauty of a negative cashflow conversion cycle is that it phase shifts your profits forward in time, giving you more cash to spend today.
Customers are financing the company’s growth by lending money at effectively zero interest.
In professional services, time is your unit of inventory.
It burns up and expires every day but you pay for it in discrete intervals relative to when work is done.
For example, if you close a deal, sign a client, and they pay you in cash up-front for a month of work. A month of work gets done. And then you pay your contractors who performed the work. You have a negative cashflow conversion cycle because you 'sold' those hours of work in advance, billed them, and then paid out the inventory hours to your contractors.
The allocation of time is what matters.
When you commit to hiring an employee, you pay them throughout the year. But what you've done in a time-inventory sense is purchased 80 hours of the next two weeks of their time with a put option to end their employment if you cannot use their time or cannot afford to pay for it.
When you sign a client to a service business, the reverse happens. Let's say they sign a contract for 80 hours of work over two weeks. They commit to purchasing 80 hours of time, in advance, with a put option to end the contract if they aren't seeing value or cannot afford to pay for the service.
So the way to achieve negative cashflow conversion cycle in a service business, is to accept cash up front from clients as much as possible, pre-paying chunks of service delivery. And increase payment terms for as much labor cost as possible. For example, paying contractors net-15 or net-30 after a monthly work period.
Not all hours are created equal - more efficient service can lead to higher margins depending on your business model - but we'll ignore that for now as a topic for another day.
Let's look at two examples to illustrate the point.
Company A has $1m of payroll & contractor costs every month, and charges $3m for their work to clients.
They pay employees and contractors every 2 weeks, and get paid by clients net-30 after a month of work.
After two weeks, Company A has spent $500k with no revenue.
After one month, they spend $1m with no revenue.
Two weeks later, they spend another $500k. Still no revenue.
Another two weeks go by, and they pull in $3m from clients.
Now they have $1m cash to spend on marketing, growth, and improving services.
And the cycle repeats
Company B also has $1m of payroll & contractor costs, and charges $3m for their work to clients.
Except, this company charges cash up front from clients on day 1, pays employees every 2 weeks, and pays contractors net-30 after a month of work. Let's say employees & contractors are a 50/50 mix.
Immediately, Company B has $3m in cash at the start of the month when clients pay.
After two weeks, they have $2.75m
After one month, they have $2.5m
Two weeks later, they have $2.25m
Another two weeks go by, and they pay contractors and another payroll.
There is now $1m cash left over.
However, notice the timing of the cash.
Both companies end up with $1m in profits.
But Company B can spend that money right away. Company A has to wait 2 months to get the cash.
If that $1m is reinvested into marketing with a 3x ROAS, also paid up front with a 60 day sales cycle, Company B ends up with $3m more cash than Company A after two months.
Thus, leading to faster growth, more money to reinvest into providing quality services, and so on and so forth.
Sounds great. Difficult to pull off.
The challenge in real reality with achieving a negative cashflow conversion cycle is twofold.
- Actually selling prepaid contracts
- Making sure you have enough capacity in your staff to service work that's sold
Of these challenges, #2 is way harder to deal with.
Good people are the lifeblood of good business.
So you might be able to sell $1m of contracted work, and collect the cash tomorrow.
But who is going to do the work?
You can hire people in advance of need to shore up your capacity.
But then you front the cash and make your cashflow conversion cycle worse by paying up front for talent.
You can close the deal and then find the talent, but then you have to scramble to make sure you can staff the project after it's committed, ie Just-in-Time service delivery.
Having a bench of talent in the form of employee applications and contractors you can scale up to meet service demand is pretty much the only way to do this.
Your imperative in running a great service business is to keep tight control on your payroll costs, secure a talent pool, close client projects, and then minimize the time lag between client needs and hiring talent to service those needs.
If you do this well, you will enjoy the beauty of a negative cashflow conversion cycle.
