Grow or Die? No, Scale or Die

scale or die

The old saying “grow or die” is now “scale or die.”

I love the Grateful Dead song, “Uncle John’s Band.” There are so many great lyrics …

When life looks like easy street, there’s danger at your door …

but the lyric that hits me is

Woah, oh, what I want to know, where does the time go?

And like that it’s November. And November means “planning season.”

It’s time for us to push to finish the year strong and set our plans for next year. For business owners, it’s a crazy time of the year with getting budgets together, starting CPA audits, holding forecast planning sessions, scheduling the annual offsite, and conducting year-end board meetings to finish the year strong.

As you set your targets for next year and plan for growth, here’s a tip.

Don’t let overhead get ahead of you.

For many companies, overhead equals death! We have all seen businesses that grow the company’s headcount and overhead costs based on planned revenue. They add a marketing department instead of outsourcing specific expertise or making sure they have strong operational processes in place. They add staff based on expected volume without thinking about outcomes. This is a big mistake.

The idea is to scale. Do more with the same or less. Not do the same with more. Expected revenue does not equal actual revenue. When we decide to add people, we need to ask, “Are we making things bigger or are we making them better?”

I love using modeling projections tools – it’s a very powerful exercise. But we need to be careful to use the correct assumptions. By definition, projections will be wrong, but with a focused plan, accuracy dramatically improves. Businesses need to look at their people and processes and think about expected outcomes. What are the rhythms of daily, weekly, monthly, quarterly, and annual tasks? Specifically – what are the metrics and measures that indicate staff has achieved the outcomes expected of them? Work on scaling by using efficiencies, training, technologies, and tools.

Effective scaling increases your revenue at a faster rate than your costs. Today’s technology and tools combined with improved processes and training can help your company grow using the same or less overhead (obviously dependent on your business.) Be intentional in setting specific goals, milestones, and measurements for the upcoming year, and involve your team in the process. (The last thing you want to do is overwhelm them, but you can incentivize them to be more efficient and intentional in scaling their own processes for the good of everyone.)

And while doing this, don’t forget to focus on your current priorities to complete the goals you set earlier this year. Even if you only get 80% of the way there, you can still finish strong rather than taking an unfocused approach and accepting whatever happens. Use what you learn to prepare for next year’s proper scaling so that your growth can be a result of actual earned revenue to set you up for the future.

Fourth and Final – Finishing Strong

Football four

It’s the fourth quarter and your team has the ball on the 10-yard line. The score is tied with two minutes to go. Football is particularly exciting (or nerve-wracking) as the game winds down and the score is close. What happens in that last quarter determines who wins the game.

The fourth quarter of your business is similar, and we are cruising fast to the end of the year.  In this fourth-and-final quarter, there are four things you should do to help your business win, stay strong, and enjoy success.

Get Your Team Energized to Finish the Year Strong and Be Ready for 2023

With most of my clients, I am wrapping up the quarterly meetings.  In these meetings, we are looking at the numbers to ensure that everyone is on the same page regarding key goals and approaches.  I generally find that the team is around 70% aligned. We use the opportunity to increase that percentage by having an in-depth discussion of the historical results and looking at the rest of this year and going into 2023 to align the teams’ vision and long-term strategies. Knowing exactly where you are can give you motivation and energy for what needs to happen next.

Ensure a Solid Q3 Close

If you’ve established effective processes and routines, your accounting staff should be keeping up with the necessary tasks to ensure you have accurate numbers and information for future decisions. If not, focus on getting these procedures polished (with assigned task checklists ) and getting your staff on board completing them efficiently and effectively EVERY month.

Get Your Short-term Targets in Focus

What are you hoping to see happen in your business during the fourth quarter? Write down these short-term goals and initiatives, narrowing them to be specific, measurable, and fitting for your team.

Start the Budget Process

2023 will be here soon so you’ll need to have your budget in place to ensure an effective transition. It may be a simple matter of copying and tweaking this year’s budget. Or, you may have to revamp if some areas of your growth or scaling did not match your expectations. What are the big initiatives and capital needs next year? Develop your planned organizational chart and get input from your staff for their needs to support their roles for the upcoming year. Start formulating your sales targets now so you can solidify them in November. Consider cost-cutting measures or redirection of funds to more effective endeavors such as product development or marketing for next year.

Bonus Task

I find it interesting the statistic that 98% of business owners don’t know how much their business is worth.  Their business is their most valuable asset, yet most have no idea of its value until they decide it’s time to sell.  I know a couple of owners who recently transitioned from their business and the offers they received were substantially less than they anticipated. In addition, knowing the current value of your business makes it easier to intentionally increase it over time with well-informed decisions.

I suggest all business owners do a business valuation every few years. If you haven’t done this in the last couple of years, arrange to do one this year. Our valuation process is inexpensive and efficient, and you’ll be amazed at how the information helps you as you head into 2023 and beyond.

Become Less Relevant to Your Company

leader

Working with businesses to standardize and improve their processes is one of my favorite things to do. I just finished working with a medium-sized business whose owner was very engaged in every aspect of the business and every decision needed to run through him. We flow-charted and documented each substantial process by function, including sales, billing, shipping, payroll, payables, and reporting.

Now, because of these documented processes, the owner can let everyone else “run” the company while they focus on continuing to grow and scale the business. This takes a huge mindset shift for the owner – from being the main person in the business to being more of a shareholder.

I see so many business owners that are in the way of their business’s growth.  They feel they need to be involved with each decision and the business cannot run without them. The team cannot make decisions without the owner’s blessing.  The owner has trouble going on vacation and, if they do, they check in daily. They are involved with training new employees. They are involved in getting daily tasks done. They are involved with everything!  As the business grows, the owner puts in more hours to stay ahead, but they can’t keep up. This will not work long-term and the business hits a growth wall.

The goal is to become less relevant in your company.

It’s the natural evolution. Let’s take a look at the stages:

Startup: business owner is very involved

Growth stage I: the business owner is the main person with every decision

Growth stage II: processes are in place. Everything is delegated to competent and engaged employees. The owner focuses on growth and the overall mission.

Sustainable stage: the company operates similarly to a public company where the business owners now have little to no engagement in the daily operations of the company.

Procedures follow a similar trend line:

Startup: no procedures in place

Growth stage I: the business owner starts to establish some procedures but still may be doing most of the work themselves

Growth stage II: more procedures are in place and the business owner had delegated far more

Sustainable stage: procedures become internal controls and the business owner has a systems mindset, rarely handling everyday procedures themselves

A key to moving through these stages effectively is well-documented processes. Great systems, worked by great people, lead to a great business. Great people alone won’t cut it. If any task takes more than three steps, it should be documented as an SOP (Standard Operating Procedure.)

One employee in a finance department I was working with made the following comment on a process: “It’s performed ‘as needed’ and the ‘how to do it’ is based on the person doing it.” Red flag. That’s the wrong perspective. It should be, “This is the way we do it here.” That way, the process is easily replicable by any staff person or new hires in the future.

With my current project, we took a very holistic view. For each process, whether it occurred daily, weekly, monthly, quarterly, annually, or occasionally, I asked “What is the current process and how could we definitely improve it?”  We set some improvement targets, and we will revisit and tweak them again next quarter.

I also make sure to introduce Verbeck Associates’ pillars: the weekly scorecard, the rolling 13-week cash flow worksheet, accurate financial numbers, quick production of monthly financial reports, and efficient consistent business processes.

Building a great business takes a great team practicing great processes. The founder/leader is vital, but they should have a vision of becoming less relevant as time goes on.

How to Increase Your Cash Flow

cash flow

Business owners face many challenges today – cash flow being one of the most challenging. Attracting and retaining top talent, marketing strategy and establishing a strong brand, business growth, time management and delegation, and communication are also on owners’ minds. But from a financial perspective, cash flow is often the biggest problem owners face today. This is a result of the timing of performing services, invoicing the customer, receiving payment from the customer, paying vendors and employees, and managing operating expenses. Most businesses need to be more profitable and need to improve cash flow to do all these things well. That goal gets especially complicated if certain seasons are slower than most – like summer.

Monthly revenue fluctuations can cause havoc in forecasting your results and cash flow. But since a steady cash flow is a vital part of a healthy business, there are steps you can take to increase it no matter what the season.

How to Increase Your Cash Flow

  • Work your accounts receivable. The squeaky wheel gets the grease. Make some phone calls to speed up collections. Consider reducing credit terms offered. If accounts receivable are a significant portion of your balance sheet, measure and graph days sales outstanding (DSO) monthly. DSO is calculated as follows: accounts receivable ÷ (credit sales ÷ days in the period). I generally like to use 3 months of sales ÷ 90 days to calculate average daily sales divided into accounts receivable.
  • Reduce your inventory levels. The number of days on hand is the number of days it takes from inventory purchase to sales (i.e. how long product sits in the warehouse.) The lower the days, the more frequent the turnover and better cash flow. Measure monthly and look to reduce the days on hand. Lower inventory balances do increase stockout risk so you do need to be careful reducing inventory too much.
  • Push accounts payable. Can you negotiate longer terms or quick pay discounts? Remember the value of a quick pay discount is very substantial if you have adequate working capital.
  • Increase profitability. This isn’t always easy, but look at low-margin products and focus on operational efficiency. Sometimes tasks and projects take your team’s time because you give them time. If I give you 30 days to clean your house, it will take 30 days. If I give you six hours, you’ll be amazed at how much you’ll get done in six hours.
  • Put a line of credit in place. This helps provide a safety net when needed, especially during slow periods.
  • Consider creating a cash flow contingency fund. The next time you are in a more profitable season, set aside funds that can help with cash flow in the slower seasons.
  • Stay on top of records! I create a rolling 13-Week Cash Flow worksheet for all my clients, update it weekly, and develop strategies for asset velocity (accounts receivable, inventory, accounts payable) and profit enhancement.
  • Practice good budgeting and planning. A realistic budget, and plans that take slower seasons into consideration, is a huge help in leveling out cash flow concerns.

Which of these steps do you need to focus on most? If you don’t have the time to do these things yourself, it may be time for a fractional CFO. Contact me today for a free initial consultation.

Second Half Baby – Let’s Go!

half time

It’s that time of year again – the first half of 2022 is already over. We’re at half-time, just like in a football game. This is when the coach takes the team to the locker room to examine how they’ve performed so far, give some leadership inspiration, and reinforce the plan to regroup and outperform the other team in Q3 and Q4.

In a similar way, I just wrapped up Q2 reviews with a couple of my clients, and I tell you it’s eye-opening.  It’s an opportunity to increase performance with a solid plan and to make adjustments as necessary based on more realistic and better data now available to us.

Here’s the simple process I use for a mid-year review:

  • Do a solid close for June and get the reporting package completed asap.  I like to close the books in 2-5 days. 
  • Lay out monthly income statements for the last 18 months on a spreadsheet.  Format to print on one page.
  • Breakout revenue in COGS (Cost of Goods & Services) by significant business segment.
  • Develop a revised monthly sales plan if your sales results differ significantly from your initial budget for this year.  Solidify the plan and lock it down.
  • Examine your org chart with actual monthly data by department. For some businesses, this is easy – for others it is cumbersome.
  • Re-forecast your operating expenses based on current levels aligned with the next six months’ expectations.
  • Develop a 2nd Half Year Business Plan (2HYBP) – one page with monthly summary income statements.
  • Make necessary changes to the personnel plan – review all accountabilities and ensure all are aligned with the revised plan.
  • Review and communicate the plan with the team.
  • Review at least monthly.

This process becomes easier if you have a rolling forecast versus a static budget  – meaning as one month completes another month is added to the forecast. I use a rolling forecast for all of my clients.

I have a client in the professional services consulting business that lost a large customer in May. The sales plan needed to change significantly because of this loss. The team developed a revised sales plan; if they achieve it, they will be strategically much stronger.  Difficult changes were necessary, but with brief stutter-step, they were nimble enough to make the change.

You can do this too. You can’t always control what clients and customers will decide. But YOU are in charge of running your organization with a best-practice approach. This habit positions you to handle storms and be ready for potential new business. I can help. Contact me!

Process Makes Perfect: Helping Your Small Business Avoid Failure

Process

Small business is not as small as you think. Did you know that there are 32.5 million small businesses in the United States and that they generate approximately 45% of the US economy? A small business is defined as a company with less than 500 employees. 80% of these small businesses have NO employees! The other 20% account for 40% of all private-sector jobs, and 60% of all job growth this year. And it’s worth remembering that all large corporations started out as small businesses. There’s no question that small businesses are essential and significant.

Sadly, 20% of small businesses fail in the first year, and over 50% fail within the first five years. Those are sobering statistics given how important small businesses are. Why are these businesses failing?

The Top Five Reasons for Small Business Failure

  • Poor cash flow management
  • Losing control of the finances
  • Bad planning and a lack of strategy
  • Weak leadership
  • Overdependence on a few big customers.

As a virtual CFO helping companies become more profitable, I see the above happening on a regular basis. For most of those challenges, there is a common solution.

Strong processes.

I believe a disciplined approach is key. For example, when it comes to accounting, I help my clients use a simple framework that incorporates a weekly scorecard to project financial results and cash flow with a look toward monthly goals. For this to work, having accurate, up-to-date numbers are essential. This allows for wise decision-making.

Another benefit of a disciplined approach is the documentation of processes. I find this is best done with a 2-person approach. One does the actual procedure while the other documents what is being done. The final documentation doesn’t have to become a cumbersome ‘operations manual’. Written checklists are great. You can screen-record the actions or have an employee make a demonstration video and save the links in a company-wide folder or intranet for easy access. Such documentation resources can help you in training your employees to be on the same page with how processes are to be done.

Consistency and efficiency in processes are vital. One of my client experiences was helping unite the staff who were differing over how they approached systemic processes. One department was, “We do it this way”, and another was “Well, we do it that way”, etc. I helped them get to, “No, this is how WE do it as a company.”

Consistency and efficiency can also help the company succeed without the owner having to be involved in day-to-day operations, allowing them to focus on their business’s longer-term vision. The secret lies in systems that make sure transactions are handled consistently no matter WHO is doing the work. As an added bonus – strong documented processes significantly increase overall business valuation!

How is it in YOUR company? Do you have good systems in place? Are they documented? If not, I can help. Contact me!

Cash Flow: Examine to Advance

I did a cash flow exercise the other day with a new client, and they were blown away by the simplicity of some cash flow enhancement techniques.

The company was a $6,000,000 manufacturer with approximately $600,000 in accounts receivable, $1,000,000 in inventory, and $300,000 in accounts payable. We calculated simple annual cash flow velocity (amount of time to turn a sale into cash and pay the respective vendor).

Right off the bat, we noticed that inventory seemed much too high, accounts receivable collections hadn’t been a priority based on the aging, and vendor terms could possibly be adjusted to improve cash flow.

Inventory

We looked at the inventory valuation and noted excess and slow-moving inventory. When touring the facility, I noticed that raw stock seemed high. Some of the excess inventory was pre-planned due to current supply chain issues. This made sense, but there were some inventory levels that could be reduced immediately. After our evaluation, the leadership made some decisions regarding purchasing reductions and are going to look at selling some of the excess inventory. If they can increase inventory turns and decrease days of on-hand inventory, they are expected to increase cash by $400,000.

Accounts Receivable

The next step we took was to look at their accounts receivable. With a little more attention to collections, they believed they improve the aging and could easily reduce DSO by 5+ days increasing cash by $80,000!

Vendor Terms on Accounts Payable

We looked at their accounts payable and determined we could push two of their main vendors’ payments out without any negative vendor impacts. We also noted a few of their vendors were offering 2% 10, net 30 terms. Our calculations showed that pushing two vendors out would increase cash by approximately $100,000 and by taking advantage of the discount terms offered by other vendors, the company would add approximately $36,000 of purchase discounts to their bottom line. See my previous discussion of purchase discounts here.

They were shocked by the impacts of these simple cash flow techniques, and how small gains can make a huge difference.

Your turn. Here’s how to increase your cash flow:

*         Ask your vendors for five more days to pay. See if they offer quick pay discounts.

*         Study your inventory levels and determine if it makes sense to reduce them and still be able to meet production and customer needs. Most companies have too much safety stock on hand.

*         Review your accounts receivable. Make calls to the slower paying customers not only for collections but to reframe your expectations. If they can’t comply, consider increasing pricing to cover the extra carrying cost or if the case is an ongoing challenge, it might be time to suggest they transition to another supplier.

You’ll be pleasantly surprised how much these few steps can help your bottom line. Contact me for a free chat about your current situation!

Quarterly Review: Review. Reframe. Realign. Rekindle.

The first quarter just ended. It’s time to check in to see how your performance is tracking compared to your goals. Do you need to rethink any goals or realign any projects? Are you on track with your financial forecast and the large projects you laid out last fall in anticipation of the new year?

Things constantly change, and we are facing new challenges already this year. Inflation. Interest rate increases. Global conflict impacts. Supply chain issues. Attracting and retaining talented staff. There’s likely something going on in your company that isn’t coming together in quite the way you expected. (If that’s not the case, keep up the good work!)

For many, a quarterly review provides the opportunity to discern what needs to change to get back on track. It could be the plan itself. Maybe it’s too ambitious given current challenges. Then again, maybe it’s not a big enough stretch! Or it could be the approach to daily work and decisions that needs changing. Are the processes and expectations set up in a way to encourage movement toward the goals?

Schedule a time to take a deep dive with your team to review, reframe, and rekindle what the goals and priorities should be over the next quarter. This meeting is also a good time to realign all team members to the common goal, if necessary. (Doing this quarterly helps everyone stay on the same page.)

Here are some questions you can use at your meeting:

Review

  • What went well last quarter?
  • What didn’t go so well last quarter?
  • How are we tracking with our revenue, margin, and net income goals?
  • Are one-year and three-year goals still on target?
  • Did we finish any Q1 goals? If so, celebrate! If not, determine why not.

Reframe

  • Are our current projects aligned with our long-term goals?
  • Overall, are we on track with our mission?
  • What goals are too ambitious that we can modify while still stretching ourselves?

Realign

  • Are all team members on board with the mission of the company?
  • Do all team members understand our upcoming quarter’s goals?
  • Are we working in a collaborative way (not silos) to accomplish goals that benefit the entire company?

Rekindle

  • Are we tired? What do we need to do to refresh ourselves and the team?
  • What haven’t we celebrated that we need to?
  • Have team members had the opportunity to personally speak about the company goals so they can be part of the goal-setting process?

Let me give you some real-life examples.

Kicking Myself into Gear

I do my own reviews, and I find that when my goals have slipped, it’s generally because my focus has slipped.

For example: in the first quarter of this year, I had set three prime goals for one of my clients. I misjudged the amount of time the projects would require, and I had to push like crazy in March to make the deadlines. It was a scramble, and honestly, I rushed more than I should have in order to get them done. Lack of focus/misjudgment of time in January and February caused the buildup in March. But I didn’t give up. Instead, I dug deep, focused on meeting shorter, bite-sized, biweekly milestones, and got two of the projects done. (We were able to push the third to Q2.)

The Big 3

For another client, we publish quarterly “Big 3” goals, breaking each one into smaller tasks for visibility and accountability. This really helps the team know where they are at and stay motivated.

Beefing Up Accountability

I’m also seeing many goals and projects slip with some clients. Their intentions are good, but there is a lack of accountability for unmet goals. For those clients, I help them strengthen accountability structures/policies and build in some “intolerance” for continued deadline slips. (My CPA upbringing plays into this – deadlines were unbending.)

You can see that there isn’t a “one size fits all” with quarterly reviews. The important thing is to DO THEM so you can review, reframe, realign and rekindle enthusiasm for your organization’s goals and dreams.

How CEOs Can Transform Financial Stress into Success

stress

CEOs and business owners are under a tremendous amount of stress these days. Even if the business is profitable and has decent cash flow, leaders face uncertainties such as supply chain issues, inflation, difficulty finding staff, the potential of rising interest rates, the pressure of the board of directors to perform better and corporate taxes.

It is said that the bigger your business, the bigger your problems. But effective leaders can handle the challenges, if they are prepared. The key is to notice potential problems early enough to let you develop a plan and be ready to execute early to avoid or soften the impact. For many business owners and CEOs, forward-looking financial reports can really help.

Here are a few tools I use to help CEOs and business owners reduce the stress load caused by the financial side of their business:

  1. A weekly cash flow forecast process that lays out incoming and outgoing cash activity on a weekly basis
  2. A weekly scorecard to get early detection of upcoming issues
  3. Systems and processes that produce consistently accurate financial results

I’ve discussed the weekly cash flow process in the past and can’t emphasize enough the importance of this tool – it’s one of the best tools to see and predict cash sources and uses and spot any problems in advance. Many of us are used to running our companies using monthly financial statements. While they contain valuable information, the numbers tend to come out too late and are based on accrual accounting. Using the 13-week cash flow forecast, we can see more granular changes more quickly on a cash basis. This gives the company and the team a weekly view of results and time to mitigate any cash crunch.

The weekly scorecard tracks key performance stats and leading indicators that help spot areas of concern in advance. With data compiled and reviewed weekly, these leading indicators can signal if some things are heading off the rails. For example, a scorecard can provide early detection for margin erosion or an indictive problem with the warehouse causing customer service issues.

Having solid back-room processes that produce up-to-date, accurate, and reliable data consistently, reduces stress. If leaders are unsure if the numbers are accurate, it’s harder to make wise, data-based decisions. If they can’t rely on the financial system, they are operating a business while wearing blindfolds.

In my turnaround work, most companies I work with do not have solid financial statements and certainly aren’t producing them in a timely way. Leadership can’t rely on the data, and they waste time when they try to figure it out.

Even with tools and processes in place, issues and difficulties will arise. You should expect that. One of my associates does her bookkeeping for business AND personal life every Friday. She self-admits that number-crunching isn’t her core strength, but staying disciplined with this routine helps her spot challenges and make adjustments as needed before they become major issues. She’s learned to be less discouraged about finding an error and celebrate the fact that staying faithful to her system helps her course-correct before a major source of stress develops.

Things happen, but the better prepared we are, the better we can handle the situation. Use these CFO tools consistently. Just like getting a medical physical helps you ensure systems are functioning and indicates where to make corrections, CFO tools like these help you examine and encourage that your business is running optimally. And that means far less stress for you.

How to Add $722,000 to Your Balance Sheet

balance sheet

I work with many bankers and lawyers who call me when they have a customer or client whose company is in trouble or needs help improving their business. The initial assessment takes about a week. We review the companies’ internal controls and backroom systems. Then we look at the historical financial statements, the current forecast, relative cash flow drivers, and their profitability matrix. In the process, we discover the core areas of needed improvement – generally, the situations are related to inaccurate forecasting and inaccurate financial statements. 70% of business owners don’t have an accurate view of their numbers! Sometimes immediate triage is necessary.

Generally:

  • The company is not consistently profitable.
  • The books are in bad shape.
  • The business owner needs to get a better viability on cash flow.
  • The owner doesnt know what their company is really worth or how to improve valuation.
  • Leadership is concerned with the company’s financial performance.
  • Certain financial covenants were tripped.
  • Internal processes are ineffective and needed improvement.

I remember one company specifically. Sometimes you can tell how a business is managed as soon as you walk in the door. I should have realized right away what I would be facing! The controller worked at a long table. Papers and invoices were in piles all over the table. You could feel (and see) the stress immediately.

During my initial conversation with the controller, it quickly became clear that the financial system (Peachtree at the time) wasn’t accurate. He was way behind getting invoices into the system and accounts reconciled. He was making decisions based on the bank balance vs. the book balance. He was manually tracking outstanding checks (with a stack of un-mailed checks) and was barely making payroll every week. On the day of my visit, he had just received his annual worker’s compensation audit invoice and had not planned at all for that $15,000 expense.

This is the way he ran the business. The odd thing was that he thought things were going okay! The phone was ringing, they were very busy and they were making payroll. But he was stressed out every week to make it. And when new inventory was needed, he had to scrape up enough money to get it – usually robbing Peter to pay Paul – which would catch up with him later. He left old accounts payable open with an “I’ll deal with that later” mentality.

This is not okay. To gauge a business’s performance you need timely and accurate financial information.  Also, there’s a huge difference between accrual accounting and running the business on a cash basis.  It’s important to understand the difference and know that many times, using cash-based thinking may be necessary – certainly, in dire situations, cash-based thinking is the only way to have a successful turnaround. See my previous discussions on the 13-Week Cash Flow forecast process. Before I go back to the story, let’s look at the business cycle.

The process starts with sales.  If we follow the cash, sales turn into accounts receivable.  Accounts Receivable turns into cash.  Cash is used to purchase inventory, pay employees, pay operating expenses and taxes with the leftover being cash profit.  Profit is necessary for viability. 

The flow meters and gauges relate to accounts receivable, inventory, and accounts payable. Debt can be used as necessary but comes with a cost. ALL of these things need accurate tracking.

We had to establish some simple systems. Geno Wickman, the creator of the EOS, Entrepreneur Operating System, is an example of how this is done, and some of my clients are successfully using his system. His recommendations include:

  • Review your financials every month.
  • Manage a monthly expense budget.
  • Track the five to 15 most critical numbers for your business every week (e.g. visitors, followers, leads, appointments, proposals, sales, revenue, errors, customer satisfaction, cash balance, accounts payable, accounts receivable.)

I would add to also review your cash flow and sales numbers weekly.

Back to the client’s story.  We implemented several basics.  First, we got the financial process in shape.   It’s arduous at first getting messy books up to date and a solid closing process in place.  But like the utility room flooding  – you need to turn the hose off before you clean up the water.  Once the financial system was up to date and accurate it was easier to run the business with the book cash balance vs. the bank balance.  

We developed a 13-Week cash forecast, implementing a weekly update and review process. 

We re-evaluated the inventory process, measuring the current state, developing plans to improve, and graphing progress.

We developed strategies to improve cash flow.  We looked at customer terms and payment history, we examined and reduced inventory stocking levels, we looked at vendor terms and accounts payable terms.  We developed tracking for these drivers and expense reductions. 

It’s amazing the effect on cash these cash flow drivers can have.  Let’s look at the accounts receivable gauge and the effect of proper strategy.  In another client case, I worked with a medium-sized distributor.  At the time they were doing $20,000,000 in revenue with $2,500,000 in accounts receivable.  The aging was a mix of approximately 100 customers with various balances in the various aging buckets.  Based on the math, the day’s sales outstanding (DSO) was 46 days.  We worked with the credit manager and the sales team to improve the turnover.  We measured and graphed DSO weekly.  After two months we were able to reduce DSO to 38 days and in six months we were at 32 days. 

Based on these actions, we added $722,000 of cash to the balance sheet – and in this case, reduced interest expense by $45,000.

Back to the original story: we saw a major turnaround in the company with more accurate and timely records helping the owner have a better handle on his cash flow and make better, informed decisions. And, as you can imagine, he experienced far less daily stress.

Does any of this sound familiar? Let me help you and YOUR company. We may not be able to add $722,000 to your balance sheet, but we can reduce your stress, forecast results better, and help you become more consistently profitable. Contact me today.