Cash Flow Management – A Useful Metric
There are many financial metrics that can be utilised to look at the working capital and cash flow issues of a business. For the purposes of this post I want to focus on one number that can be a useful tool for a business.
This is a financial metric called days of working capital. To calculate this metric it is:
Working Capital ÷ Sales By Day
Working capital is defined as Accounts Receivable + Inventory – Accounts Payable.
This metric shows how much working capital we have on hand, and we need to cover sales. If the answer comes up as 22, then we have 22 days of working capital on hand to cover sales generation. Whilst this is a historical indicator, it is still a useful number to know to consider sustainable growth ie growth that we can fund from existing working capital.
Too many businesses fall into the trap of growing quickly and not being able to keep up with cash. This number shows a business how many days of working capital they have on hand and thus shows what sales growth is sustainable.
To be able to grow faster it will be necessary to add to working capital. This could be added by taking out a long-term liability, which will add to the current cash position of a business, to ensure that the sustainable sales targets are able to be met. This metric gives an insight into managing the sales and working capital needs of a business.
Photo: Alan Cleaver
Quantitative and Qualitative Measures
Quantitative data never tells the whole story. Quantitative data is easier to collect and analyse and thus we tend to give it a far greater importance in our business. The accounting industry makes it easy for us to get a raft of quantitative data on the performance of the business.
Qualitative data though completes the story. But collecting and analysing qualitative data is a much harder process, and thus often is neglected in the management of the business.
For example to make a good product decision we need to know what is being sold, to whom, at what margin, this is the quantitative data. But we also need to know why some products are selling more than others. This question of answering the why takes a qualitative analysis of our customer’s decision, and often this involves judgment calls. But it is this qualitative data that will complete the story about the reason why a product or service is selling more than another.
The quantitative information may imply, a pricing or a market need, but the qualitative data, ie. actually asking the customer, may indicate that there’s something altogether different that is going on.
We need to have both qualitative and quantitative measures in a business. We need to have the judgment calls as much as we need to have the cold hard factual financial analysis. The blend of qualitative and quantitative data will give us the tools to lead and manage a business.
Photo:- by digitalART2
A Metric to manage inventory & sales growth
Inventory management, or stock management in a business is critical to both the cash flow and sales growth. Too little stock has the issue of effecting sales, and too much stock has the issue of negatively effecting cash flow. It is a fine balance of the stock levels that meet the twin criteria of cash flow and sales growth.
Larger businesses invest in sophisticated systems to manage this balance. They have invested in sophisticated ordering processes and reporting. In all businesses though it is useful to keep an eye on a measure that can give an insight to this balance. This measure is inventory compared with sales.
We measure this by: -
Sales ÷ Average Inventory
We can look at this on a monthly, quarterly or annual basis. This shows how much inventory we have as a percentage of sales.
The important issue with this metric is to measure it on a trend-line. A one off snapshot does not give a lot of an insight into the management of inventory. The trend of this metric though can give an insight as to whether our inventory policies are better managing or are negatively managing our stock levels.
It is not the metric that’s going to provide all insights into the business, but it is a useful measure, particularly looking at it from the trend-line.
Closely related to this is the average inventory turnover. This is having a look at how many times the inventory turns over in a year. The greater the turnover the better, because it is the velocity of the inventory through a business that determines both the sales and cash flow growth.
These measures can provide a useful insight into the management of an important area of the business, being inventory.
Photo: Molajen
What Problem Do You Solve?
In business today we can get tied up in our products and services that we offer. We can talk to prospective customers and current customers about the various range of products, models or services that we can provide. But people don’t buy products or services, they buy solutions. I know it’s an old adage that ‘they don’t buy the drill they buy the hole’ – ‘they don’t buy the sausage they buy the sizzle’ – so my question to you is “What problem do you solve?”
I’ve been thinking about this, with respect to my business. So I thought I’d take the opportunity to explain some of the problems that I solve.
1. Business owners are not getting the operational result i.e. profitability, cash flow, team engagement, customer engagement that they desire.
2. Wanting to get some hard numbers on the soft issues e.g. leadership customer engagement.
3. Too many meaningless numbers in the business.
4. Helping the team to understand how the business makes money; helping the team understand the mathematics of business; helping the team gain financial literacy.
So I conclude this post by again asking “What problems do you solve?”
Are Putting Your Customers Through Unnecessary Processes?
In the last post I covered the issue of the unnecessary fees and charges that are being imposed by businesses small and large. Further on this line of thinking, too often businesses are making their customers or clients go through processes which may make sense from the internal operation of the business, but in no way make sense to the customer.
Recently I had to get a washing machine serviced and also an air conditioner fixed. I had a look at a website of a particular company (a small Brisbane company) that stated that they had a division for washing machine repairs and also air conditioning repairs.
So I contacted them and mentioned that I had these repairs and I was put through to the air conditioning division, where I then spoke to a person about the air conditioner and then I said “I need to also book in somebody to come and have a look at the washing machine repair.” To which my reply was “That’s not my division, I will need to transfer you back to the main switch.”
So back to the main switch I went and it was like calling for the first time. I then got transfered to the washing machine division and I go to go through all my information again because this was the washing machine division.
I had given all my personal contact address details, phone numbers and everything to the first person, but I was asked to go through the process again because their internal operations were obviously separate and they couldn’t, in any way, merge the two. It was an unnecessary process and this just happened to me very recently so I am highlighting it. However, there are many examples that I could utilise.
We need to think of business from the customer’s perspective. We need to understand what is success as judged in the eyes of the customer; how are they experiencing our business?
It is only through a deep understanding of the customer that is both understanding of the behaviour of the customer, through observation, but also understanding the numbers that come out of dealing with our customer base. We need to understand exactly what they don’t like about our processes and redesign it to remove the unnecessary processes. The end result of unnecessary processes is customers who are not completely satisfied.
The repairs to my washing machine and air-conditioner have been completed successfully. But what is the story I am telling people – it is the story of the first contact.
Unnecessary Fees And Processes
Invoice
Recently I have been noticing a rise in fees that have been added to various accounts with some amusing names (handling or processing fee). Telstra last year tried to implement a fee where you had to pay extra to pay over the counter your bill. This fortunately was removed by the public pressure.
Some banks charge you more to use the over the counter services than the electronic services. Other organisations also have fees and charges that appear on the bill and they don’t have to be the large public companies that are mentioned earlier.
These fees and charges are possibly being seen by some of the internal accountants and financial officers as ways of raising additional revenue without increasing the price of the good or the service.
But the impact from the customer point of view, far out weighs any benefit that these unnecessary fees and charges incur. It is not just the large companies that are doing this practice. Many small businesses seem to be adopting the practice but be careful.
Recently I had my car serviced and when you look through the bill there was four separate little fees, none of which exceeded $5, that were added on after the labour component and the parts component, etc. It leaves a sour taste in your mouth as a customer. The additional revenue that the business has charged adds up across all customers, but what is the impact on the customer.
Instead of the service or the experience being remembered, the little fees and charges take a bigger significance. It is always the little things in business that have a big impact and unfortunately these little fees are having a far bigger impact than most businesses are crediting.
So have you gone down the path of imposing some little fees, service charges or levies on your clients? If so I would seriously reconsider these and just consider increasing the price and accordingly, increasing the experience the customer has.
The Three most important things to measure in any business.
“The three most important things to measure in any business are customer satisfaction, employee satisfaction and cash-flow” Jack Welch former ceo of GE.
I don’t agree with all that Jack says or did in his tenure at GE however on this point I am in total agreement.
Customers who are not happy will buy elsewhere. Employees who don’t enjoy working for your business will move on and work for your competitors and the replacement employee will be costly to replace. Lastly if a business does not completely understand its cashflow and is totally in control of it then the business growth can suffer.
Measuring customer satisfaction is more than just a quick survey from a call centre. We need to understand whether the customer is truly satifised with the complete experience in dealing with the business. We need to ask the right questions in the right manner. Customer surveys can work if carefully desgined. However there may be other ways to measure customer satisfaction eg in a professional service firm it would be appropriate to measure the number of referrals. A customer will only refer if they are happy. Singapore Airlines measure the number of complaints to the number of compliments ratio to address this issue. Whatever the measure everybody needs to understand it and then it must be tracked consistently.
Employee satisfaction can also be measured by a carefully executed survey. Unfortunately many of these surveys are not properly designed or carefully executed. Also there are other measurements that can be useful eg staff turnover rate (this needs to be tailored for each level of the organisation). Again whatever the final tool, everybody must understand the metric and then it must be consistently measured and reviewed.
Lastly a business must understand the cash-flow cycle. There are a number of operational and capital impacts on cashflow. To manage a business it is necessary that this is understood. Accounts receivable, accounts payable, new equipment, new loans, repaying loans and other finance obligations, owners drawings and contributions are only part of the equation. The complete cashflow of the business must be managed at a minimum each week if not daily.
Also some of the component parts need constant measurement eg debtors and creditors days. Recently in a business they had not previously being measuring debtors days. When I started it was 43 days. Purely because they started measuring it and the accounts staff and the owner were suddenly aware they took action and now the debtors days stand at 29. This has lead to a significant improvement in cash-flow.
What systems to you have to measure customer satisfaction, employee satisfaction and cash-flow?
Two profound statements on team managment.
I recently heard a business owner state that “it is easy to get what you want when you are clear on what you want”.
Following on from this I saw a blog post from Andy Sernovitz in which he stated “want to get people to change their behaviour? Take away the excuses.” (Andy was primarily talking about managing customers.)
Both of these statements are full of gold in managing and engaging team members.
We need to be very clear and precise about what we want from the team and how they will be measured. Also if we remove the excuses the results will follow.
Often management complain about the team not doing aspects of their job or not thinking of the customer. But have they been clearly told what is expected. I mean clearly. Management may think they have told the team but is it in writing showing exactly the obligations, the measurements and the bonus upon achieving this.
It is necessary to teach the team the benefits of treating customer the way you would. The team are there to make money for themselves. It is necessary to show them the connection between the fact that way for the business to make money is to serve the customer. This sound trite and obvious but have a look at the exact messages that the management is sending to the team. What is being reward or recognised? Is it customer service or something else.
Remove the excuses. To often I see management accepting excuses from the team or having the systems set up so that it provides excuses to the team. Review all systems and procedures and KPI’s to ensure that customer service can never be ignored.
So remove the excuses and detail exactly what you want.
Don’t wait for perfection – just do it
The words that Nike have made memorable “just do it” is something that all of us in business (or everything) need to practice.
Don’t wait for perfection. Don’t wait until you have the product, service, system absolutely perfect. The important thing is to take action.
Above is a picture of razor blade with the words “Just do it”. I like this juxtaposition. By taking action we will be cutting through and succeeding. So use the blade and “just do it”.
Look I am hugely guilty of this and that is the reason I am writing about this. Often I keep researching an item or trying to perfect a way of doing something when the key was keeping the first draft, take etc up and going and then refine it from there. This can be applicable to so many aspects of business.
For instance I recently was involved in designing a job costing system for a client. The client wanted it perfect. We had numerous drafts and revisions but still no operative system. Finally I sat down with the general manager and stated that we needed to get it going and refine it from there. Fortunately I was persuasive and it got underway. This process then started revealing issue no draft would have ever considered. Perfection can wait.
It does not matter whether it is a system or a product / service, podcast, newsletter etc.
Action will refine it and create the perfection. – Just do it
Photo credit – bbaunach.
Best Motivation Video
Recently I saw this video and was reminded again to ” Follow your dreams”
If you have not failed you have not tried.
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