I am a fan of movement toward the use of the word "pivot" to describe the key business model changes a start-up implements in its quest for the most effective and scalable way to deliver its products/services to the market. I am an advocate of making sure that each of the pivots improves the cash flow and working capital cycle of the venture.
In a recent article I wrote for American Express OPEN Forum, 10 Business Model Pivots to Improve Cash Flow, I detail some of the ways this can be accomplished. Here are a few examples of how this works.
Example 1: Lean Inventory
An e-commerce company warehouses all of the products sold through the website. The founder quickly realizes all of his cash is tied up in the inventory he is holding in his warehouse, and he doesn't have enough cash to grow at the pace he could. By getting the supplier of several of the products to start drop-shipping about 80% of the sales, the company could grow much more quickly for very little cost. The supplier was happy with the increase in business, and charged very little for the extra warehousing costs (shipping charges were the same).
Example 2: Master Marketing
Marketing needs to be a metrics-driven part of your business. Writing-off marketing expenses as "branding" is wholly unacceptable for start-ups trying to pivot to maximize cash flow and grow. we have to focus on qualified lead generation with the best chances to convert into paying customers. When a founder counts every dollar spent on marketing and tracks its efficacy, the founder is empowered to grow in the most cost-effective mediums available. Reducing cost per lead and customer acquisition cuts expenses and increases revenue, a double-jolt of cash into the working capital cycle.
Example 3: Variable Cost Reliance
Out-of-the-gate one entrepreneurial founder hired several employees and signed an expensive lease for office space. But when it came time to make a pivot based on customer feedback and demand, those fixed costs became a burden that ultimately sunk the business. Use contractors and stay out of long-term fixed cost agreements to give yourself the freedom to shift and pivot towards your most effective business model.
Example 4: Invoice Timing and Terms
One entrepreneur was afraid to invoice her customers too early. She would wait weeks after the delivery of her products to charge her customers. With a little research and a pivot, she now receives payment before the product is delivered, and her customers are just as happy as when she waited up to 45 days longer to get her cash.
Business is about cash flow generation. Every pivot you make should be directed at accelerating your cash flow, or you'll find yourself falling far short of your potential.