Why measure cash flow drivers? Because, as they say, what gets measured gets improved, and more cash is a splendid thing.

Step 1: Identify your firm’s cash-flow drivers

Is your business model based on high profit margins or leverage? Are your sources of cash customer acquisition and retention or market share? What are your firm’s drivers?

Step 2: Identify marketing activities that ultimately affect your company’s cash-flow drivers

Your marketing department engages in a wide range of activities — but which ones truly affect cash flow drivers? Executing TV ads? Web sites? Trade shows?

Step 3: Define an outcome metric for each marketing activity

An outcome metric is a measure enabling you to evaluate how well the activity generated the intended results. Of course, something like “sales leads” is important, but is only an intermediate result because leads don’t necessarily turn into sales—or cash flow.

Step 4: Show how your outcome metrics affect cash-flow drivers

How will each intermediate outcome metric affect the cash flow drivers you identified in step 1? If you’re based on margin, could you further improve margin by building brand preference through loyalty programs? If so, maybe it’s worth paying a premium here

Step 5: Test the assumptions behind your cause-and-effect links

If you have assumed that satisfied customers buy more frequently, does the data back up a cause-effect link between customer satisfaction and purchase frequency? The more you can articulate your causal assumptions and gather data to confirm or dis-confirm them, the more you can make a credible business case for which marketing activities will affect which cash-flow drivers—and how.

Step 6: Quantify anticipated cash flow over time

Now estimate your marketing activities’ impact on cash flow over time. The brand you create today may have the potential to generate a premium price and cash flow many years down the road. Identify this long-term cash flow and quantify it in a defensible manner for your executive team—even as you recognize the underlying assumptions and uncertainties in your forecasts.

Step 7: Identify future opportunities for your firm

Developing new products is risky business: Companies invest hugely in R&D—yet a disturbing number of new offerings fail. As you identify promising opportunities, put a dollar value on each. That may be hard to calculate, but finance people do it all the time—by putting a dollar figure on an option, including all assumptions and risks.

Think about it: financials turn the wheels of your business. Heck — financials are the wheels of your business.

And yet, one of the biggest mistakes you can make as a business owner is assuming that your CFO knows it all, understands it all, and handles it all.

The cold, hard truth? The buck stops with YOU.

As a business owner, you are ultimately responsible for the financial health of your business.

Think the poor economy is your biggest obstacle? Think again.

According to business wizards (not their actual titles) Dun & Bradstreet, most business failures can be traced to poor management resulting from lack of knowledge.

The most common causes:

• 32%  Poor management of financial activities
• 15%  Lack of management competence or experience
• 12%  Inflation and economic conditions
• 12%  Poor books and records
• 11%  Sales marketing problems

Ultimately, Dun & Bradstreet say, over 80% of businesses surveyed failed because of issues under their control.

Scary? Maybe — but it should also be empowering.

The lesson: don’t sit back and assume that things are being taken care of. Know what’s going on. You should be looking carefully at the reports produced by your CFO and financial team.

And if they aren’t producing reports, they should start — yesterday, if not before.

Financial health is a team effort, and you’re captain of the team.

If your team isn’t able to give you the support and resources you need to take charge, it might be time to start thinking about making some trades.

Speaking of support, we’re always here to help with your company’s accounting and bookkeeping needs. Don’t hesitate to give us a call.

Many business owners like to think that they’d know if their business were susceptible to fraud.

After all, they think, I know everyone who works here and I don’t hire shady characters.

As it turns out, this is the exact logic that can get a business into trouble. That’s because small businesses are uniquely vulnerable to fraudulent activity. The per-employee losses in the smallest businesses are 100 times the amount of their largest counterparts.

A good rule of thumb: consider 5% of your revenue gone via fraud. Yes, we said 5%.

Shocking? It should be.

Lack of risk awareness is one of the biggest — and most easily solvable — problems.

Fraud is rarely committed by the people you’d think. Most fraudsters don’t wear orange jumpsuits; they wear sweater sets and sensible shoes. It’s often older employers; managers; someone you trust implicitly — and that’s exactly how they get away with it.

But how can my most trusted employee defraud me? you ask. Fraud isn’t always malicious. Often, it’s a good person in a tough situation — and this economy isn’t helping. Fraud happens when pressure, opportunity and rationalization coincide.

Cash fraud is most common, and fraudulent disbursements are the most common form of cash misappropriation. This means false invoices or forged checks.

How to prevent fraud? First you need an excellent fraud policy. Then you need to enforce that policy. This means vigilance and follow-through. Internal controls are your best defense.

Need more information? Want to see a sample fraud policy? Give us a ring — we’re ready to help you with your business needs.

Some capital expenditures don’t have a clear and quantifiable ROI, but they’re still important. This list includes furniture, office equipment and computers, and pens of course, since all the good pens keep mysteriously disappearing.

When the capital expenditures don’t directly add to the revenue line, it’s crucial to be savvy: for example, unless you’re Don Draper, you probably don’t need a plush chaise lounge and a fully stocked bar in your office. You will also want a computer that will last, but do you really need the latest, fanciest gadget?

Other capital expenditures, such as plant equipment, directly result in revenue generation. These types of expenses are easy to justify via ROI, but that doesn’t mean you should rationalize your way into overspending.

Most growing businesses go through an accelerated growth phase, then it slows, then it plateaus. The cycle may or may not be repeated but it is a common pattern. Over the full cycle the need for capital expansion and the ability to fund it internally move, perversely, in opposite directions. At the peak of growth accelerations, a company’s need for space, equipment, etc. is usually the greatest. This is, of course, exactly when they don’t have the money to fund it.

Which is why it’s important to spend money wisely on CapEx (well, on anything really). Investing too much, in the wrong technology, or not staying current can be deadly.

You will get a much better understanding of how we can help you keep your expenses organized by contacting Owl Bookkeeping and CFO today. Check out our monthly newsletters too. They are filled with great information.

Perhaps it’s not quite as fun as accounts receivable, but accounts payable is still crucial — after all, paying the bills is part of what keeps your business rolling.

Consider:

• What you can get from your vendors?
• How closely do you manage to those terms?

Let’s talk about how to optimize this swing factor to, er, swing things in your favor.

(Ha!)

Upfront negotiations

Suppliers want to sell to you. Obviously. When you’re starting a new initiative, you may be able to work out better terms for your purchases. This is especially effective while the supplier is in the shiny happy closing-the-sale phase.

The tricks? Be candid. Be proactive. Ask for what you want.

Discounts

The Internet has opened up a world of shopping possibilities with discounts galore. Take advantage of the opportunity to shop around and compare prices.

Some companies benefit from buying supplies and products in bulk at discounted prices, but be careful — if you are a young firm with a high growth rate, cash can often be better utilized in areas.

In very cash sensitive companies, don’t forget to look at Cash-n-Carry discounters.

Prioritizing

Not all accounts payable are equal. Know your company’s top-priority payables; these are the high stakes elements — if they’re not paid by a certain date, bad things happen.

Examples:

• Health insurance
• Payroll
• Payroll taxes

Second-priority payables are typically:

• Vendors of critical services
• Primary material suppliers, etc.

If necessary, triage your payments.

And there you have it! Isn’t spending money fun?

Anyone…?

Okay, okay — but we can help make it painless. We’re just a phone call away and we have a whole arsenal of accounts payable expertise.

“Don’t worry, we have plenty in stock!”

Right Way of Thinking:

“Darn, we have plenty in stock!”

You may think of excess inventory as a cushion. Padding. Comfort.

In truth, inventory is simply cash collecting dust on your warehouse shelves. And excess inventory? Dust bunnies.

Let’s repeat that: inventory = cash.

Of course, you don’t want to be out of stock, but the trick is to run as lean as possible.

When you spend money on inventory, you want it to turn into money from your customers as soon as possible. Money generates no cash sitting on your warehouse floor.

Inventory can be measured in days using this formula: (Inventory in dollars / 12 months rolling Cost of Goods Sold dollars) * 365

If you’re a business with inventory, you should be measuring this monthly.

Here are some tips to manage inventory:

• Understand the different kinds of inventory (raw material, work in progress, and finished goods) and track them separately.
  • Where in the process is your money idle?
• Seek ways to purchase raw materials differently in order to cut down on COGS.
  • Can you standardize or streamline the manufacturing of any components?
• Use sales forecasts and lead time analysis to manage production schedules.
  • Can you stagger shipments?
  • Can you adjust purchase order sizes?

We have plenty of ideas to keep it lean and green (green like cash, that is). Give us a ring!

Now it’s finally time to move on from cash flow drivers — but we’re not going very far.

The next few posts will tackle cash flow swing factors. These are elements that tend to be on a pendulum — and their position on that pendulum can make a big difference in how much cash you have and where it is at any given time.

Accounts receivable is all about the terms you give your customers and how well you manage to those terms. A lot of money can be tied up in Accounts Receivable — and if you don’t collect, it you are serving as the bank for your clients.

Accounts receivable is discussed in DSO, or Days Sales Outstanding.

DSO is calculated using the following formula: (AR Total / Annual Sales) * 365 = DSO

If you are not measuring DSO every month, you should be. This is your primary measure of how efficiently money is flowing from your customers to you. And you want this system to be efficient.

Really efficient.

Extra, super, ridiculously efficient.

So how do you impact accounts receivable? Here are a few ways:

• Make sure your terms are within industry norms
  • There’s no reason to be an outlier here. If everyone else is Net 30, don’t be 60.

• Educate your clients (especially new clients!)
  • Your clients aren’t mind readers. Don’t assume that they understand your expectations — it’s up to you to set those expectations, and then manage to them.

• Become the squeaky wheel
  • Speak up if there’s a problem — before it gets bad.

• Consider factoring

And then…

• Start collecting your money

Sound easy? Super.

Looking for a bit of guidance? No problem. That’s why we’re here. Give us a call today.

Rule #1: Cut carefully

The easiest cuts are usually the ones that have the smallest amount of immediate impact on the company’s success. Unfortunately, these are often the cuts that will do the most long-term damage. It’s important to understand the difference between resources that are “fat” and resources that are “muscle.”

Rule #2: Consider capacity

Do you need a bit more muscle? If so, how much? At some point, “step-functions” come in to play for nearly every business. For example, you may need to hire a whole person even though you need a half of one (we will resist the temptation for a joke about cutting people in half; that would be in extremely poor taste). Hiring more resources than you need — even muscle — gets expensive until you use up that extra capacity.

Rule #3: Only pay for what you need

Some expenses can be added “as needed” or outsourced. It’s possible to outsource or hire “fractional” employees for virtually every aspect of your organization.

Rule #4: Add carefully

If you think you’re ready to add resources, first take a critical look at: 1) why you are adding, and b) the ultimate P&L upside of your potential addition. If there isn’t a compelling impact to your bottom line, you may want to re-visit your logic and save your money for more critical investments.

We’re proven muscle builders and fat cutters. Give us a call to see how we can help you follow the rules and get with the (cash) flow.

Increase Pricing: A solid market analysis is a very useful thing when determining appropriate pricing. Conduct a market analysis every few years – more often if your industry or market is in flux.

You should also consider your place within the industry. Are you the low cost provider (thereby quality and service are secondary) or the luxury brand? A market analysis will give you a better picture of where you fit along the spectrum and help you determine whether there is wiggle room in your pricing.

Decrease Expenses: The other way to increase gross margin: Lower your costs — wisely!

If you are a service firm and your largest expense is payroll, there may not be a way to decrease your cost of sales without sacrificing quality, service, and the goodwill of your current employees.

If you are a manufacturer, the options are more diverse. You can pay your labor differently. You can buy material differently. You can re-engineer the product so it uses less material or standardizes components.

* Companies can also look at Lean or Kaizan practices. Want to learn about Lean or Kaizan? Want help with a market analysis? We’re just a phone call away.

So how do you drive cash flow for your business? There are several ways. We could list all of them now, but that would be like eating the whole box of chocolates on day one. Pace yourself, people.

Let’s start with the largest cash flow driver: revenue. Revenue has no upward limit. Expense control does. You’ll never get to zero dollars spent in cost of sales or overhead, but there’s no cap on how much you can earn — as long as you do it responsibly.

To (wisely) maximize revenue, consider the following:

• Capacity: Keeping ROI in mind, determine if/where you have capacity to expand your business using existing resources. Who or what is idle? Do you have some machine time available? Are there members of your sales team or engineering team who can handle additional work?
• Marketing Mix / Contribution Margin: Unlike gross margin, contribution margin takes into account ALL costs involved with providing the good or service. Couple the contribution margin with where you have additional capacity, and you’ll probably have a fairly clear direction of where to place your emphasis on revenue growth.
• Growth Takes Cash: You need to know how much you can afford to grow given your current operating cash flow cycle. There’s actually a Self-Funding Growth Formula. Make sure you run this formula before you embark on revenue as a cash flow generator. Not familiar with this formula? Ask us.

As a matter of fact, if any of this still seems a bit fuzzy, give us a holler. That’s why we’re here.