Company Growth: Slow and Steady Wins the Race

by

Most business owners, CEOs, and CFOs associate the rapid growth of a business with success. But you don’t have to search too long or far to find a company that met its demise after an attempt to expand at a fast and furious pace.

Of course, most business owners aren’t going to scoff at the idea of their small, startup company becoming the next Amazon or UPS! Lofty goals are admirable, but it is wise to proceed with caution. It’s not uncommon for the owner of a booming business to be overconfident and make the mistakes of growing too fast.

Mistake #1: Lack of Cash

One of the biggest problems of rocket-speed expansion is a cash flow that becomes a cash trickle, or even a cash desert. Growing a business takes money, often more money than there is in the company piggy bank. Up-front investment capital is needed for assets such as building and equipment as well as day-to-day operating expenses like salaries and inventory. Pouring capital into a new venture is always risky because no one can read the future. Unexpected events and circumstances affect the economy, which in turn can affect your business.

Mistake #2: Lack of Quality Control

Quality control is another aspect of a business that can suffer with the too-much-too-fast approach. The pressure to increase production puts stress on over-worked employees that may push them to cut corners. Hiring and training qualified people take time and can be hard to keep up with production. Morale can become low and tension amongst employees can build.

The downsides of rapid growth aren’t the only reason to consider taking a slow and steady approach to expansion. Business owners who learn to trust the process, take time to enjoy the fruits of their labor, and appreciate loyal employees seem to enjoy their success that much more. Speed can get you there faster, but it can also kill the business before it arrives at its destination.

Growth is a good thing but do it within the capabilities of the business. Every business has a “speed limit,” often referred to as the Affordable Growth Rate (AGR). Your company’s profitability and capital structure will dictate how fast you can grow. For help determining your company’s AGR, check out our Financial Model Tool Kit

Want More Cash Flow? Look At Your Inventory

by

Have you ever been told your business made a nice net profit, but there is hardly any money in the bank account?

Cash flow for a business is more than just making a profit. If you have an inventory of products that you sell to your customers, then the amount of inventory you keep on hand and cycle through to sales will impact your cash flow. It’s one of the four pillars that drive cash flow (check out our articles on the other three: A/R, A/P and EBIDTA).

Maintaining a proper level of inventory is important to help sustain sales growth. However, too much inventory can lead to cash flow issues and restrict a company’s ability to meet its obligations. Customer buying patterns and other economic factors can all help determine how quickly you can cycle through your inventory.

Understanding how many days of inventory may you have on hand is an important measure for your cash flow. Knowing this metric can help you spot trouble where inventory in your warehouse may become obsolete.

How do I measure inventory cycle?

Below is a formula for calculating the number of days inventory on hand.

  • Formula
    • Cost of Goods Sold / 365 days= daily cost of goods sold
      • Inventory / daily cost of goods sold= days of inventory on hand
  • Example:
    • $500,000 / 365 days= $1,370 daily cost of goods sold
      • $75,000 / $1,370= 55 days of inventory on hand

In the above example, this company has approximately 55 days of inventory on-hand, or in other words, the company turns over inventory a little over 6 times a year.  This metric is dependent on many factors including supply chain constraints and vendor source opportunities.  The important fact is to measure this regularly to understand what it means to cash flow.

For instance, if the company reduces its days of inventory by 5 days down to 50 days, then it would have approximately $7,000 more cash in its bank account.  Managing inventory levels is as much an art as it is a science based on the numbers.  We don’t have a crystal ball to know how our customers might change their buying habits or when an economic event may occur that impacts our industry.  However, knowing how to measure our inventory in relation to how it impacts cash flow is important knowledge to make timely and reasonable decisions.

Do you know your inventory days on-hand?  If not you may find yourself asking the question of why you had such a profitable year, but you don’t have any cash left in the bank. Check out our downloadable template to help you measure this important metric. Let us know if you have any questions.

Predicting The Next Recession

by

I have read many articles where experts try to predict a recession based on their leading indicators. Some use the stock market, others use consumer confidence index, and the list goes on. I recently read an interesting article that plotted a measurement that seemed to predict every recession since 1976. While this may not be true for future recessions, a business owner should stay aware of a few indicators to be prepared. For recessions are opportunities for strong businesses to come out ahead of their competition.

What is the indicator?

It’s known as the “yield curve.” The yield curve is the interest rate of U.S. Treasuries at different maturity dates (6-month, 1 year, 3 years, etc.) that the U.S. government issues to finance some of its day-to-day operations.

During typical economic times, the short-term Treasury bond interest rate (“yield”) will be lower than the long-term Treasury bond yield. The reason is that the person investing in the long-term Treasury bond should get a larger yield (interest rate) for taking on the risk over a longer period, where inflation and other factors could impact the return on this investment.

How do you “Read the curve?”

When the yield curves align, referred to as “flat”, then their return is the same. For instance, a short-term and long-term Treasury bond both have a 5% interest rate yield.

It’s when the yield curve “inverts” which means the shorter-term Treasury bonds have a higher yield (i.e., interest rate) then the longer-term Treasury bonds, this becomes the red flag that a recession is coming. It’s the proverbial “canary in the coal mine” warning that the economy is about to turn down.

Ever since the Federal Reserve began publishing this information about short-term and long-term Treasury bond yields (that is, the ten-year two-year spread), it has accurately predicted a recession in the United States. It seems that none of the recessions in the last 70 years have occurred until the yield curve has inverted. Keep your eye on the ten-year, two-year interest rate yields; it might help you plan for the next downturn.

Looking to recession-proof your business? Check out our easy-to-use Financial Planning Tool Kit

Your Mindset Matters!

by

We all know someone who had big dreams that unfortunately did not come to fruition. There is nothing wrong with dreaming, in fact, it’s good to dream. But dreaming without action doesn’t make a dream come true. Behind every award, published book, completed marathon, and CEO, is a lot of old-fashioned, hard work and positive mindset.

Writer, marketer, and entrepreneur Matthew Royse believes a positive mindset is paramount to success. He emphasizes this simple, yet critical factor in his article, “50 One-Sentence Life Lessons.” These succinct, yet impactful, lessons are powerful reminders amidst the chaos of life. (I recommend keeping a copy close by to re-read often.)

10 favorites from the 50 Royse lessons:

  1. You are responsible for your own happiness.
  2. Life isn’t as long as you think.
  3. What you do today reflects who you’ll become tomorrow.
  4. Befriend fear, don’t fight it.
  5. Your life is a reflection of your perspective.
  6. There will always be skeptics of what you do.
  7. The difference between success and failure is persistence.
  8. You can’t say “yes” to everyone.
  9. The biggest risk is not taking one.
  10. Failure is your greatest teacher.

The good news is it’s not too late to change the way you think. It takes motivation and practice. There are endless methods and tools to help you transform your thought process. Meditation, mindfulness, exercise, vitamin D, nutritious eating, and support from others (both formal and informal) are all touted by people who thrive. There are also specific programs that teach people to recognize negative thoughts, stop, and rethink from a new perspective.

Minds are malleable, and are made to be used and improved. It’s never too late to change your mindset, embrace your challenges, and shift your outlook on life.

Forecasting Cash Inflow: A How-To Guide

by

Cash flow is the lifeblood of any business. And forecasting cash inflow from customers? Well, that gives you the ability to truly own your numbers and grow your business.

Building a cash flow forecast includes several components, from customer inflows to the numerous outflows with employee expense, vendor payments, and bank loan repayments.

In this Numbers Coach TIP, we are going to focus on a few methodologies to determine customer inflows and how to forecast them. I have used the following methods depending on the client’s business model:

  • Payment pattern by each customer
  • Sales pattern flow
  • Collection pattern flow

Customer Inflow Forecast Method #1: Payment Pattern by Customer

In this method, we layout by customer the expected timing of when we will bill them and then allocate their payment to the month they have paid based on their history. In this case we are plotting out when each customer will pay during the forecasting period being analyzed. This typically works well when you don’t have a lot of customers and the services or products that you provide to them are recurring.

Customer Inflow Forecast Method #2: Sales Pattern Flow

In this method we layout the forecasted billing based on the period being forecasted (month, quarter, year). Then using our average collection cycle metric, we plot the collection of the sales based on the average cycle length. For example, if it takes on average about 30 days to collect our accounts receivable, then if I plot billing in February for $20,000, then I would show the collection of this amount in March.

Customer Inflow Forecast Method #3: Collection Pattern Flow

In this method we layout the sequence of how much of the billing is collected in subsequent months. For example, January billing we analyze how much of it gets collected in each subsequent month from February through December. In February we might collect 50% of the January billing. Then in March we might collect another 30% of January billing. In April we might collect 10% of January billing. We layout this collection pattern and choose several billing months to analyze and then use the average in our forecasting calculations. This method takes more effort and possibly more time due to the need to dig into the details of your collections.

Whichever method you use, by at least trying to calculate your forecasted inflows, you will gain the knowledge on what works and what does not to fine tune this critical element of your cash flow forecasting. No matter how accurate your forecast, you will gain insights into your business to help you make better decisions.

Forget 1 Million, Focus on 1,000 for Success

by

During my time at college, I had a friend who was obsessed with the idea of making $1 million. How hard could it be, he wondered, to take $1 from each of 1 million people? “Look at the guy who invented the pet rock. He became a millionaire selling. . . rocks!” my friend observed.

Creating the next big fad was his plan, but he quickly found it’s not easy to duplicate the success of the pet rock. Creating a product that could command the attention of 1 million people is a challenging dream to chase.

I recalled my friend’s ambitious plan to gain 1 million customers while recently reading author Kevin Kelly’s essay entitled “1,000 True Fans.” The main point of the essay is that most of us do not need 1 million customers; 1,000 will do nicely.

Defining a “True Fan“

Kelly’s “1,000 true fans” are people who would do almost anything to help their favorite businesses prosper. He gives the examples of a singer whose devotees will drive 200 miles to hear her perform and a writer whose fans buy hardback, paperback and audio versions of his latest book.

We would all like to have diehard fans like those, but they are difficult to attract. That’s especially true if your business provides a product or service that is not unique – like state-mandated auto emissions tests, for instance. Nobody is going to travel 200 miles to get their emissions test from you, except possibly your mother.

On the other hand, I have clients like dentists and property managers who are very highly regarded as regional experts. Their top clients, or fans if you will, are loyal to the point of sending them gifts and personalized Christmas cards. I have to imagine their fans would follow them through a change of office locations or the occasional fee increase.

Why 1,000?

Two premises of Kelly’s “1,000 True Fans” are that the entrepreneur can earn, on average, $100 profit from each true fan per year and that an entrepreneur can make a living by earning, on average, $100 per year from each of 1,000 customers. That’s $100,000 per year, but the $100,000 must be free and clear of all operating costs. In other words, it is net profit.

Why is 1,000 the magic number? That is the question I asked myself while reading “1,000 True Fans.” I know dry cleaning businesses whose owners make their livings from customer bases smaller than 1,000. I can imagine Kelly’s premises being valid for a writer or a singer without a band. But for most of my clients’ businesses, some adjustments would have to be made.

As Kelly explains: “The number 1,000 is not absolute. Its significance is in its rough order of magnitude — three orders less than a million.” So, 1,000 is not posited as the be all and end all. It’s an approximation far closer to the mark than 1 million customers.

For an entrepreneurial professional with employees, the business probably needs to clear $100,000 per professional (maybe more depending on the region). And, the 1,000 customers likely needs to be expanded to accommodate a practice of several professionals.

The key point is that attaining 1,000 customers is an achievable goal. You can grow your business to that size by adding just a few accounts each week. And, if 1,000 is achievable, so is 2,000. It just takes more time. . . and an unwavering commitment to keeping customers happy.

Here’s to your 1,000!

Mike, The Numbers Coach

4 Keystone Habits For Financially Savvy Business Owners

by

I recently read an article by Jari Roomer about daily habits by people who have their personal finances well in order. As I read the article, I thought how these habits would also be applicable to a business.

What are the habits?

  1. They put their money to work
  2. They resist lifestyle creep
  3. They save
  4. They continuously upgrade their financial IQ
  1. Put Your Money to Work. Roomer was referring to a person investing their savings into income producing assets such as stock, bonds, or real estate. For a business owner, this would be the equivalent of seeking out complimentary revenue streams and products that would not only increase their sales but also diversify their revenue. By having more than one way to earn money, a business provides a hedge against having only a single product or service line to depend upon.
  2. Lifestyle Creep. You may have experienced this yourself whereas your income grew, so did your expenses. For some, the expenses might even exceed their increased income. For a business this can also happen. A business owner may see opportunities (I refer to these as “shiny objects”) to invest their newfound income. Later, they find out that it didn’t work, and they failed to have enough saved to cause potential life-threatening damage to the survival of the business.
  3. Saving. Personal finance experts will often recommend that you save 3 to 6 months of expenses as your “emergency fund” for when unforeseen circumstances such as a large medical bill or repairs to your automobile. The same holds true for a business. Saving 3 to 6 months of expenses can give the cushion that a business needs to weather similar unforeseen circumstances. Who would have thought in our lifetime that a pandemic would come along and shut down our economy for months? Many companies found themselves in dire situations and unable to pay their employees to keep them onboard. Be sure to build in a cushion to protect your business.
  4. Continuously Upgrade Your Financial IQ. This is where the business owner and their leadership team have a desire to continue understanding what their numbers mean. These business owners seek out the education and resources that ensure they can equip themselves to understand the financial results of their business. The numbers are the way a business keeps score, just like a professional sports team keeps score so they know who has won the game. Here at The Numbers Coach, this is exactly what we work with clients on doing: Owning your numbers.

Build these four keystone financial habits for your business and your leadership team. It can be the difference between success or failure.

A Financial Dashboard Helps You Manage Your Business in Minutes

by

There are many hats to wear when you own a business. One moment you’re a salesperson, the next you’re working on customer service or human resources. It comes with the territory.

But not all hats are equally comfortable. For many entrepreneurs, the financial management hat can be a tough fit. Why? Business owners have time limitations, and the time commitment for financial management can seem too great.

A good dashboard, however, can help make financial oversight of your business time-effective. You need only spend a few minutes weekly to have a good idea of where you stand.

Key Data at a Glance

Here is a dashboard that’s designed for a manufacturing operation. It focuses on just four pieces of basic financial information:

  • Sales
  • Cost of goods sold
  • Expenses
  • Profits

Let’s assume the business is the startup of a first-time business owner. The metrics are very simple. The graphical presentation is attractive. The dashboard provides real-time figures for the current month, as well as year-to-date performance. The first metric the owner sees on the dashboard is sales – arguably an important piece of information for a new business. The current month’s sales are broken down by product, so the owner can quickly check which products are selling well and which are selling poorly. Below the monthly sales total is a bar graph of the year’s trend, which shows steady progress. At the bottom of the column is a comparison against plan, which quantifies actual versus budgeted sales.

The purpose of the dashboard is to provide up-to-date information about the key performance metrics of the business. In just a few minutes, the owner can grasp the extent of the company’s sales success (or failure, as the case may be) with insight into the products and cost characteristics most responsible for the results. Spotting trends early can help a business owner make changes need to impact the financial results.

Tracking Your Key Metrics

The dashboard example provides some key metrics for a fledgling manufacturing company. But, what if your company provides professional services? Obviously, you need different metrics for your dashboard. Each business is unique, and the metrics tracked will vary from one business to the next.

Here are some of the key metrics Trillium Financial tracks for its clients:

Profit & Loss Metrics

  • Sales Growth
  • Gross Profit
  • Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA)
  • Net Profit
  • Fixed Overhead as a Percentage of Sales
  • Sales per Full-time Employee
  • Net Profit per Full-time Employee Equivalent

Balance Sheet Metrics

  • Days’ Sales Outstanding (collection cycle)
  • Inventory Turnover Rate
  • Days’ Payables Outstanding (payment cycle)
  • Debt-to-Equity Ratio
  • Current Ratio

Trend Metrics

  • Sales for Trailing 12 Months
  • Gross Profit for Trailing 12 Months
  • EBITDA for Trailing 12 Months

As you might imagine, an experienced business owner may know some of his financial ratios like the back of his hand. Even so, an owner should use a dashboard to track metrics that are important for their current financial management and most of all those metrics that drive cash flow. The metrics will likely change over time to add precision. For example, an experienced owner might know that overtime pay is the surest way to diminish the company’s profitability. Their dashboard tracks the average labor rate paid as a key business metric. A documented metric helps you spot trends that can create action.

A business may start out measuring a bunch of different metrics that are both financial and operational and eventually narrow the number of metrics down to those that are predictive and meaningful. I encourage you to develop a dashboard that helps you manage your business; after all, “What gets measured gets done.”

Let us know how we can help you develop a dashboard that works for your business.

Want More Cash Flow? Check your Accounts Payable Cycle

by

Understanding the levers that drive your company’s cash flow can be the difference between staying in the game or closing up shop. A business can have positive net income, but still come up short of the cash it needs to keep the doors open.

One of those metrics that can cause a lack of cash is your accounts payable collection cycle. It’s one of the four key pillars that drive cash flow.

Accounts Payable Cycle

Some company’s vendors offer the ability to buy their products or services and pay them later. Offering this credit is like getting a short-term interest free loan from the vendor. As part of the deal, your vendor will want to get paid back based on the payment terms they offered. Understanding how long it takes for you to pay vendors is critical to your cash flow.

How do you measure it? Below is a formula that calculates your accounts payable days to pay cycle. Like the accounts receivable collection cycle, this calculation is based on a “snapshot in time” and you will want to monitor it on a regular basis such as monthly.

Formula:

Total expenses / 365 days= daily expenses
Accounts Payable / daily expenses= days to pay cycle

Example:
$900,000 / 365 days= $2,465 daily expenses
$50,000 / $2,465= 20 days to pay cycle

In the above example it takes approximately 20 days for the company to pay its expenses. Some expenses are probably paid upon receipt and other expenses may offer up to 30 days or more to pay. If this metric could be stretched from 20 days to 30 days the company would retain approximately $24,000 in its bank account. This could give it more time to collect accounts receivable from its customers and allow it the cushion it needs to pay bills on time and feel comfortable meeting its obligations.

How could it stretch the days without upsetting its vendors? A couple of strategies:

  • Ask vendors for longer payment terms
  • Use a company credit card to “time” the payment to a vendor. Most credit card providers give you up to 30 days after your statement ending date to pay the outstanding balance. Depending on the timing of your payment, this can add up to 30 to 45 days more time to pay.

Know your accounts payable payment cycle. Monitor it on a regular basis and look at strategies to extend it while working with your vendors to pay within the agreed-upon time. The right accounts payable payment cycle could be the difference between positive or negative cash flow!

Want More Time? Follow These 6 Strategies

by

We all want more time to do the things we enjoy whether that’s in our business or family.  Here are some tips on time management that can give you back your time.

  • Email can be a big time leak.  I remember hearing a colleague tell me they reviewed their email only two times a day—at noon and then again at the end of the business day.  This method ensured that they picked up email from the morning to address, and any email in the afternoon was addressed at the end of the day which would be ready for the recipient in the morning.  Also, turn off the nasty email tone “you got mail!”  It’s a distraction.  Unless you work in a life threatening business, no email is that important where it can’t wait.
  • Choose the most important goal or task that you want to accomplish each week.  This should be given Zen like focus to accomplish and helps you prioritize other items that come up.
  • Know your work habits of when you are most productive.  Some people are “morning” folks who like to get up and get going.  Others are better off later in the morning or afternoon.   Also, don’t confuse the “urgent” with the “important” otherwise you can get off track.
  • Take breaks to prevent any burnout during the day.  Get up from your desk grab some water and if necessary go outside to take a short walk.  Not only can it be refreshing, but it can also give you a different venue and thereby a different perspective on an issue that you are trying to solve.
  • Skip meetings that really are not adding to your ability to accomplish you goals.  If you are required to attend make sure there is a clear agenda and time frame so that it does not simply drag on and become a distraction.
  • Sometimes you have to use the word “no.”  Accepting requests for meetings, introductions, or joining projects can be flattering, but they can also be a productivity drain.  Its difficult to strike a balance with it, but you also run the risk of feeling resentful which will not help you at either work or home.

Implement these 9 strategies and find yourself with more time to do the things you want to do, and not have to do!

Mike

Want To Stand On Solid Financial Ground?…Follow These 9 Key Strategies

by

Don’t shoot yourself in the financial foot.  Stay clear of common financial mistakes by following these 9 financial concepts.

  • Cash is “king” so keep a handle on your cash by reviewing your cash flow statements, your weekly cash receipts, and weekly or daily cash balance.
  • Understand what would be the right mix of debt vs. equity in your business.  Each business has its own “speed limit” and growing too fast can cause you to pile on debt and thereby, risk to the business.
  • Have a written plan even if it’s a short one page which I prefer.  The lack of a plan is the plan to failure.
  • Know how to read your financial statements, and not just you profit and loss statement but also your balance sheet and cash flow statement.  Otherwise it will be hard for you to make good decisions for the business.
  • Know your costs.  This is especially true to understand at what point of your growth will you need to add more fixed cost to the business in order to go the next level.
  • Keep up good relationships with your bank and vendors.  These are your key stakeholders who can make the difference between success and failure.
  • Missing the “forest” because you are only looking at the “trees”.  You are missing the bigger picture of your business and industry.  Understand the trends and be able to step back from the business to see if you are driving in the right direction.
  • The absence of timely data from operations and finance.  If you are waiting 30 days or more to review this data, its most likely too late for good corrective action and rather you will be more in a reactive mode.
  • Lack of understanding the cause of the results.  Get to know the drivers of your business including your financial drivers.  These metrics will provide insight into the direction you are heading.

Follow these 9 key strategies and you will get the financial results that you want. Here’s to achieving your financial goals!

Mike

9 Best Practices For Constructive Feedback

by

Whether we are giving feedback to an employee for their evaluation or talking with other business associates and customers, below are 9 ways for giving constructive criticism.

  • Private criticize but publicly praise
  • Focus on the behavior not the individual
  • Keep it short and direct
  • Use an “I” message vs. “you” message
  • Be positive in your delivery tone
  • Describe succinctly and clearly what you want the person to change
  • Be empathic
  • Don’t be spontaneous in your criticism, be thoughtful
  • Recognize when the person makes changes

Tough conversations with constructive criticism is never easy, but following the concepts above can make the outcome a positive one. Here’s to having conversations that can propel you to the next level!

Mike