Improve Profit & Cash Flow with Cash Flow Story
Imagine being given the task of reaching a destination in a place you’ve never been, without the ability to impact your speed or direction and being blindfolded the entire time. Unfortunately, this analogy is frighteningly close to the financial constraints unnecessarily placed on too many entrepreneurial leadership teams - they are essentially “flying blind” while trying to reach the financial goals they are responsible to achieve.
There is an incredibly simple fix for this situation. Cash Flow Story is an intuitive software that requires the high level financial statements to be pre-loaded which then produces helpful reports on profitability trends, working capital trends, other capital trends, funding trends, business value, and sustainable growth. But perhaps the single most helpful tool to help Leadership Teams is the “Power of 1”, how 1% changes in Price, Volume, Direct Costs & Overheads and 1 day changes in A/R, WIP & A/P would impact cash flow and profitability. This allows us to scenario play what would drive the financial results of the business over the next 3+ months, and focus Rocks accordingly.
Our top five takeaways from utilizing Cash Flow Story with clients are:
A given % increase in price & volume is not the same
We have found CFS particularly useful over the post Covid inflationary environment, when all businesses were facing various increases in costs. The temptation and false assumption of too many teams prior to running the Power of 1 was to assume a 1% increase in volume is just as beneficial as a 1% increase in price. However, the reality is all of a pricing increase falls to the bottom line where a 1% increase in sales volume will only deliver your percentage profit. This of course then begs the question ‘what is your pricing strategy’? Are you giving prospects options that optimize your price?
Discounting has serious ramifications
You've probably encountered the belief that offering discounts will be offset by increased sales volume. However, it's quite common for organizations to require more than a 3% rise in volume to compensate for a mere 1% reduction in price. By dedicating time to grasp your particular ratio, you can enhance your strategic approach when contemplating price discounts.
Why focusing on revenue is not enough
Too many unsophisticated and uniformed teams are usually only told what revenue was historically and what sales goals must be achieved going forward. But as the famous saying goes “Revenue is vanity, profit is sanity and cash is king”. Focusing on revenue is a vain endeavor, and ultimately a foolish one. Too many companies are growing broke.
Gross margin is more important than revenue
What's the first thing a potential acquirer of your business will look at - Gross Margin trends. And even if you are years away from selling, focusing on increasing Gross Margin can generate significant additional sources of self-funded cash to invest back into scaling the business.
Don’t grow broke
For every additional $100 in sales, how much additional working capital do you require? (when we utilize CFS, this can be found out with the click of a button). The answer to this question is often ‘no’ - too many growing businesses are essentially growing broke. They lack the requisite gross margin, operating profit, negative cash conversion cycle (whereby their customers are funding the growth of the business) and/or access to additional capital. It’s the ultimate version of driving the business off a cliff, all the while thinking an increasing top line is all that matters.
The better way to set Rocks
Imagine at your next Quarterly Planning session, your team has a complete handle on the foregoing and knows what financial levers they need to pull over the next 90+ days to impact the financial results of the business. Nothing focuses the mind on what the most important priorities of the business should be when all members of a Leadership Team truly understand their current financial performance and the levers they can pull to positively impact cash & profit going forward.
About the Author
Tom Barrett is a Leadership Team Coach based in Nashville, and is a Certified Scaling Up Coach™, Certified Pinnacle Business Guide, & former Certified EOS Implementer™. He helps his clients build scalable businesses by clarifying their vision, simplifying their strategy and achieving their goals one quarter at a time.
