Have you ever wondered why your cash-flow fluctuates even when sales are strong? Or how your business is valued in the eyes of an external party? Then you need to know the seven (7) levers in your business.
With just a little additional focus on one or more of these 7 levers, you can directly improve the cash-flow, profitability and/or value of your business. There’s no smoke and mirrors, nor anything particularly difficult to undertake. However, many business owners do not take the time to appreciate how the financial performance of their business really works. So, let’s break it down.
Often business owners will primarily focus on sales volume, in other words trying to sell more. However, whilst sales volume is important, it’s only one of the 7 levers available to you.
What are the 7 levers in a business that control your cash, profit and business valuation?
The first four levers are focused on your Profit and Loss and therefore directly impact the profitability (and cash-flow) of your business. As most, businesses are valued at a multiple of cash earnings. These levers also have a huge impact on the value of your business (along with other aspects such as Brand, customer base / income streams, and internal expertise / “keyman” dependence).
Selling more – although increasing sales can grow your business, don’t forget to focus on the other levers below! How much of every extra $1 in revenue turns into profit and into cash in your bank account, and when?
Tip – formulate a sales & marketing plan, with a budget, which is aligned back to your overall Strategy. Review and tweak the plan regularly. This will help keep you focused on the right way to grow your top line. Any growth needs to be sustainable!
can you increase your prices? Even a 1% increase can have a big impact. There can be a fear of losing customers by putting up your prices, which can often be unfounded.
Tip – review your margins by product / service stream / customer to ascertain which sales are making you money and which are not. You need to know your break-even points! Your part- time CFO can help – they love this stuff!
Tip – the results of your pricing analysis need to dovetail into the sales & marketing plan. It’s possible to make more profit from less turn-over!
3. Cost of Goods Sold – reduction in % terms
This lever is most relevant to those businesses with direct costs such as manufacturers, construction, etc and places the focus on your gross margin.
Tip – revisit your direct purchasing arrangements and negotiate better terms and pricing. For example, bulk purchase discounts, early payment discounts, reduced freight. Maintaining strong supply chain relationships is important but that doesn’t mean you can’t ask the question (or find potential alternatives).
Tip – review your direct labour-force using metrics such as labour utilisation, overtime levels, re-work, customer complaints, and down-time. You may be able to re-deploy staff or reduce casual labour / overtime once you have this data. Again, your part-time CFO can make this happen for you.
4. Reducing Overheads
This may sound like an obvious one, but we always find at least some unnecessary “fat” in our client’s overhead expenditure.
Tip – someone needs to review the overheads line by line. Indirect / office wages, communications, insurance, utilities, freight, and advertising are the common ones where savings can be achieved. Even small reductions in certain areas can all add up over time!
These last three levers are focused on your Balance Sheet and are collectively called Working Capital. They have a significant impact on your cash-flow and therefore also on your funding requirements. Many businesses can avoid additional debt borrowings, or pay their existing debt faster by shortening their cash-conversion cycle.
5. Reducing debtor days
This means improving the ageing profile of your Accounts Receivable function (i.e. getting your customers to pay you faster).
Tip – review your credit control policy and your payment terms as customers with poor payment histories should be carefully managed. Review your collections process in terms of who chases the debt and when. The introduction of direct debit may be an excellent solution for some businesses.
6. Reducing stock days
This means a faster conversion of your inventory (if you carry it) into sold product, thereby reducing the amount of stock you hold.
Tip – introduce a stock-take process if you don’t have one. This can ensure that your financial records mirror what you actually have on the shop-floor. Then review the results of the stock-take for slow-moving or obsolete stock items which may need to be discounted in order to convert them into cash. Your purchasing policies may also need review if you are over-stocked with certain inventory lines.
7. Increasing creditor days
This means taking longer to pay suppliers (without hurting the relationship or cutting off supply).
Tip – contact your suppliers to re-negotiate your settlement terms. It’s just a matter of asking the question – they may say “no” but then again, they may really value your business.
Now you know the what the 7 levers are, it’s time to do something tangible with them in order to make a real impact on your business. If you don’t have the internal expertise or time to make it happen, we would be happy to talk to you about how a part-time CFO can bring this to life. After all, as CFOs it’s what we do!