Posted on Friday,

Grow or Die

Here’s a simple truth: At all points of time, you are either growing or dying. This applies to our lives and our businesses. For me, dying doesn’t sound good; I’d rather be growing. I focus on constantly growing and getting better at what I do in every aspect of my life. I want to be growing, not dying!

I teach the same to my clients.

I was talking with one of my clients earlier this week on growing his $50mm energy services company. These guys process about 14,000 invoices per month with an average invoice ticket of approximately $300.

The only way to grow any business is to grow the number of customers, increase the average sales value, and/or increase the frequency of customer purchase. That’s it.

The key is to focus on improving each component.

I have used this simple formula with many types of companies including medical practices, construction companies, HVAC companies, truck parts distributors, job shop manufacturers, and technology resellers. It’s a simple formula and it works.

Once you understand the power of this, it will help really grow your business.

Consider the following formula.

Number of customers x Average sale price x Frequency of purchase per year = Revenue

I put together a program for one of my client’s segment and had some amazing results.

Number of customers	1,000	1,226
x Average sale price	400	456
x Frequency of purchase per year	7	7.5
Sales	2,800,000	4,192,920	50%

Notice the geometric growth – a 22% increase in number of customers and 14% increase in average sales with small increase in frequency of purchase gives a 50% increase in revenue.

For the energy service company I was speaking to earlier this week, we outlined a small increase in the number of customers 7% based on current growth trends and an additional service offering to increase the ASP $100 as follows:

	Current	Plan	Change
Number of customers	14,000	15,000	7%
x Average sale price	300	400	33%
x Frequency of purchase per year	12	12	0%
Sales	50,400,000	72,000,000	43%

I suggest you look back at the prior 12 months of sales and get your actual numbers. Don’t make assumptions here. Most business owners I talk to make assumptions as to the number of customers they have and ASP, but when we get the actual numbers, their assumptions invariably are wrong. Dump your invoice register to excel. De-dup the customers or compare to sales by customer. I also like to calculate average invoice value (total sales divided by total number of invoices). This may be be an easier stat for your sales reps to focus on.

Note – I love the simple trick in Excel to de-dup a list (data menu, remove duplicates), then use the sumif formula to get totals. I use this trick all the time.

Once you have your actual historical data, develop creative strategies and ideas to increase each element of the growth formula. Then EXECUTE a couple strategies and measure the results. Optimize, then repeat; test and measure.

It’s the only way to grow your business. Customers x ASP x purchase frequency = revenue.

Think growth and think profit,

/jon

Posted on Friday,

Cash Flow – Can you See the Future?

Predicting and managing cash and cash flow is one of the most difficult things small businesses do.

If your company is growing, it’s important; we have all seen many growing companies blow-up and run out of cash as they’re going gang busters. If your company is not making money, it’s obviously paramount to survival. You need to watch every dollar – make payroll and keep the business operating.

I like to put two process tools in-place that really help any business predict and manage their cash flow.

The first tool which is essential for most small businesses is the ‘13 Week Cash Flow’. This should be updated, reviewed and revised every single week of the year. Put a reminder on your calendar.

The 13 Week Cash Flow worksheet is simple – it has weekly forecasts for cash receipts and a weekly forecast of cash disbursements. The trick twofold:

Being able to predict the timing cash receipts
Having place holders for planned disbursements

Predicting Cash Receipts

In smaller companies, I like to detail expected payments for all outstanding invoices. In the most companies, however, due to the size of receivable aging, assumptions must be made based on current expected cash conversion. Accounts receivable turnover is measured on a weekly basis and strategies are developed and implemented to make improvements. Small improvements in accounts receivable turnover has a dramatic effect on cash flow.

For example, a $10,000,000 parts distributor with $1,500,000 in accounts receivable, decreasing accounts receivable on average of days 5 days, increases cash approximately $139,000.

Disbursements

The worksheet needs to contain placeholders for every disbursement. Bi-weekly payroll, benefits, rent, debt payments, operating and admin expenses, A/P, inventory purchases, cap ex, debt and other payments. Look at your historical spends, open PO’s, current A/P. No surprises.

Each week, review the prior week’s worksheet with actual receipts and disbursements, and recast the next 13 weeks.

The process is straight forward and over time you get better at your predictions.

Forecasting cash flow in your business makes life much better. Less stress, more predictability, ability to make commitments, etc.

See an example of a 13 Week Cash Flow here with this simple Cash Flow Tool

The 2^nd tool to predicting and managing cash and cash flow is an Operating Plan forecasting the basic financial statements: balance sheet, income statement and statement of cash flow. The Operating Plan uses key business drivers as its base.

I’ll discuss this in more detail later.

As always – Think Profit and Think Cash Flow!

/jon

Posted on Friday,

The Year End Hustle

We are all hustling to close our financial statements for last year. The auditors are coming in for their year end fieldwork. 2015 plans are being finalized with January as a bench post.

Seriously, by now most of us small and medium sized business owners have their internal year-end financials in hand (or half-year if you are a June 30 year-end) with your 2015 projections. If you don’t have yours year-end financials in-hand, get them done as soon as possible! If you don’t have an audit or a review by external accountants, prepare you books as you do. A solid year-end close is essential. Clean out the closets.

First, ensure all month-end procedures are complete and all balance sheet and income statement accounts are completely reconciled. Solid monthly closing procedures ensure timely and accurate month-end numbers. If this is an issue for your company, definitely make this an improvement goal for this year. A quick, accurate close is essential to run your company effectively. It’s impossible to make smart decisions without accurate numbers. If back end systems and processes are in place, the close process is clean and you can look at the critical numbers real-time.

Anyway – February is also a great time to look at your numbers. Monthly, business owners should compare actual month-to-date and year-to-date results to budget and to prior year. At year end, it is a great time to look at other key statistics as well.

For most businesses, I like to look at:

Number of invoices for the year.
Average invoice amount – calculated as: revenue ÷ number of invoices.
Number of customers that bought from you last year.
Average revenue per customer – calculated: revenue ÷ number of customers.
Transactions per customer – calculated: revenue ÷ number of customer ÷ average revenue per customer.

Once you have these actual numbers, drop them into a spreadsheet as follows:

Basic Business Model	Actual per Year	Next Year Plan

Leads		1,000
Conversion Rate		80%
Customers	715	800
Transactions per year	24.00	24.00
Average revenue per invoice	$ 246.00	$ 300.00
Revenue	4,221,360	5,760,000
Margin	34.0%	35.0%
Gross Profit	$ 1,43,262	$ 2,205,000

SG&A	$ 1,100,000	$ 1,100,000
Net income	$ 335,262	$ 916,000

Note the small improvements in number of leads, conversion rate, and average transaction value have a huge increase in profitability. If you can increase the number of transaction per year, even better. I also like to track customer churn and work on strategies to decrease attrition.

Also, look at sales and gross margin by business segment and by customer. Several techniques can be used to including summarizing customer data in a matrix as follows.

Work to move customers from the LV/LM quadrant.

Also, business owners need to review their balance sheet. Many small and medium sized business owners skip or skim over the balance sheet. Remember, the balance sheet is a snapshot in time of what your company owns and owes.

Important items on the balance sheet include leverage ratios, accounts receivable turnover, inventory turnover, and accounts payable payment days. All are straight forward calculations.

Note the power of cash flow with the follow example:

If you are a $20mm business with $2.2mm in accounts receivable, a 5-day improvement in receivable turnover means a $274,000 incremental increase in cash flow.

Several strategies can be employed to improve turnover statistics.

This is also great time to take another look at your upcoming year’s strategic plan and operating forecasts. Consider using some of these techniques to set monthly targets and goals.

If you need any help looking at your numbers, let me know – I love helping business owners improve their businesses.

As always – Think Profit!

/jon