In our previous blogs and podcasts, we have discussed the importance of Cash Flow in SMEs. Simply speaking a healthy cash flow is the one where you show a consistent “surplus” of revenue vs expenses (profit). This determines the financial feasibility of your organisation. In this opportunity, I would like to focus on the revenue aspect by touching base on different product mix strategies you can use to better manage your cash and projections.
In my years of experience working in different multinational organisations and in my own entrepreneurial adventures, I have seen a trend, which is the underappreciation of cash flow management. In most of the instances, I have found cash flow sitting as a responsibility of the Finance team itself and nobody else. The exception was in one opportunity while working in Marketing, where one of my objectives was to meet the cash flow forecast with a maximum variation of 5{02294a49cb707d39fba7c35800b3ba014374aa1ef1f8a15aff36d8ebebbd29a3}. Therefore, day to day responsibilities were not “siloed” just to marketing related KPIs, but to support the company’s objectives regardless if there were from marketing, finance, HR or sales.
When you first develop and define the products or services you want to sell, you need to think about how they will contribute to the business. How selling a specific product or solution will impact your finances, consequently your cash flow. It is not the same to sell $50,000 once with a 6-month selling process than to sell $2,000 every week for the next 6 months. In the first case, you will need to look for funds to finance your operation for 6 months, while, in the second, you might not require any funding at all.
From a cash flow perspective, ideally, you will have a balance between products or solutions that will allow covering your operations on a short and longer term. Doing a quick cashflow-financial adaptation of the matrix developed by the Boston Consulting Group, you could have 4 types of products or solutions. In this version, I have built the categories based on two variables, the amount of cash and time your product or solution required to be sold and the profitability they can generate. This results in a 4-quadrant matrix.
Cash Cows: Products that require low cash & time investment to be sold, but are highly profitable.
Stars: Products or solutions that require both high time and investments to sell but also can generate high profits.
Dogs: Products that need low investment and time to sell but generate low profits.
Question Marks “?”: they require high investment and time to sell, profits are low.
While in the SME world we might not have all these quadrants covered (which is good!!!), you need to think about the objective of each one of the products and solutions you offer – hint: the answer is not as simple as to sell more !!!. Just bear with me a moment, and think about the impact your company will have if the most of your sales are concentrated in one single product: do you have the capacity to deliver the service, have you planned the supply chain structure to properly respond in time, do you have the inventory, what about customer experience, do you have the funds to cover the operation, what’s the impact on your profits?… This shows you the importance of having a plan and a strategy that covers more than just sales.
Lets explain the four categories further,
A “Dog” kind of product or solution could help you to maintain the business operation without much effort. Hence, they could be key to your cash flow strategy. A “Dog” could be a product that doesn’t have much differentiation but sells, it could increase traffic to your store, or could bring clients to your website. Although you could have a different opinion, a “Dog” product could be a mainstream bottle of water or soft drink you sell in your store; the basic marketing consultancy service you offer, the personal tax return service from the accountant, the business card service from the printing company.
“Cash Cow” products are those that are extremely profitable. They have the perfect formula, low investment but high returns. The coffee in an established café might be considered a cash cow as it has a big mark-up and the revenue is collected immediately, another example could be online training, or an established and solid consumer brand might also be considered cash cow. As per the examples, a “Cash Cow” product could be coming from a different quadrant, for instance, a “Dog” product that evolved to become much more profitable.
Meanwhile, a “Star” product is the one that you need to have an important cash & time investment on, but the potential profit could be great. Think about your pitching for a 6 month or 1-year contract; or developing a brand-new product or innovation, or developing a new sales channel. All these services or products will require time and investment, but the expected profits will more than compensate the investment.
Dog and Cash Caw products will support your business on a day to day cash flow, while Star products will allow you to grow (Short term vs Long Term of the company)
Lastly, you have those solutions that are a “Question Mark ?”. You need to assess what their contribution to the business is and take a quick decision on adjusting or simply moving on.
The key takeout here is to always think about your product strategy, what’s the contribution of each of the product beyond the traditional marketing and sales but to the whole organisation.
So…Do you have the Dog, the Cow and The Star?