Understanding Your Cash Conversion Cycle

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For small businesses, cash flow is one of the most important determinants of business success.  There are many metrics used to monitor cash flow, one of which is the Cash Conversion Cycle (CCC). We coach all of our clients to track CCC as a key metric.

The CCC measures a company’s effectiveness at converting its investment in inventory into cash. The cycle typically involves purchasing inventory inputs on credit (Accounts Payable), selling the inventory through sales on credit (Accounts Receivable), and converting inventory back into cash. The lower the number of days in the CCC, the more effective management is at generating cash flow from the sale of its product or service.

How the Cash Conversion Cycle Is Calculated

The formula is comprised of three figures.
•    Number of “Days Inventory On Hand” (DIO)
•    Number of “Days Sales Ooutstanding” (see article on DSO here)
•    Number of “Days Payable Outstanding” (DPO)

The formula for calculating the Cash Conversion Cycle (CCC) is:

CCC = DIO + DSO – DPO

DIO, DSO and DPO represent the three component stages of the conversion cycle.  For a service company the cycle would only include the DSO and the DPO metrics.

Breaking It Down

Let’s look at each stage of the CCC to understand the relationships:

  1. The DIO stage measures the time (in days) required to turn over one complete inventory.  DIO can be calculated using figures taken from the annual financial statements; Inventory from the balance sheet and Cost of Sales from the income statement. It is calculated as:
    DIO = Inventory /Cost of Sales x 365
    The idea is to minimize the DIO by turning over inventory as quickly as possible. Selling inventory converts the owner’s investment in inventory into Accounts Receivable, or directly into Cash in the case of cash sales at a retail store.
  2. The DSO stage measures the number of days needed to collect the Accounts Receivable. Using the Accounts Receivable figure from the year-end balance sheet and the Net Credit Sales from the annual Income Statement, it is calculated as:
    DSO = Accounts Receivable/Net Credit Sales x 365
    Like DIO, a business owner wants to minimize DSO. DSO measures how quickly the business is able to convert a credit sale into cash.
  3. The DPO stage measures the number of days it takes to pay vendors for the inventory purchased or expenses incurred to deliver your product or services. Using the Accounts Payable figure from the year-end balance sheet and the Cost of Sales from the Annual Income statement, it is calculated as:
    DPO = Accounts Payable/Cost of Sales x 365
    In contrast to the DIO and DSO stages, business owners want to maximize DPO. A business improves its cash position by holding onto cash longer. Cash flow benefits, of course, must be carefully measured against a company’s payment terms with vendors.  Its important to maintain good relationships with your vendors because they help you grow your business.

The Cash Conversion Cycle metric is most useful in comparing a company’s cash flow performance this year against the performance in previous years, or against competitors’ performance.   By monitoring the trends of the CCC metric, you can spot potential cash flow issues before they become a crisis.

How to Spot These 6 Financial Warning Signs and What They Mean

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If you read the headlines of national and local news, it is amazing that so many businesses are seemingly strong one day, and the next they are closing or filing for bankruptcy.

One of the many reasons this happens is that business owners and managers don’t pay attention (or don’t want to acknowledge) the financial warning signs that could have saved them. By the time the financial collapse starts, it’s often too late to change course.

6 Warning Signs You Can Look For

To help you spot these warning signs, here are the 6 financial red flags that we coach our clients to take action against:

  1. [The Most Telling Sign] Cash Holdings and Equity Are Lower Compared to the Previous Periods
    Take a look at your balance sheet and income statement to determine your overall cash holdings and equity (Assets-Liabilities). If your liabilities are higher, ask why.  Negotiate terms to lower credit rates, extend payment terms, etc. Involve other departments to determine how your business can operate more efficiently and cost-effectively. Discuss simple ways to increase revenue without significantly increasing overhead.
  2. Days in Accounts Receivable Increasing
    Many customers are pushing the envelope with their payment terms. Create a process for collecting outstanding receivables, and ratchet it up when customers start paying late. Customers often pay those vendors with strong systems, and delay payment to those suppliers who don’t have solid collections practices. This doesn’t mean that you won’t work with a long-standing customer who asks you for some flexibility. It does mean that you implement smart AR strategies such as late payment fees, outsourced collections help and credit reporting with clear communication and consistency.
  3. Not Enough Cash Flow for Accounts Payable
    Order in smaller quantities of goods/services from your suppliers. Talk to vendors to negotiate extended terms, leveraging your long-standing relationship and good business practices.  Use a credit card with 60-day terms to maximize the number of days to pay (make sure to review your credit card agreement and understand the terms). Search for discounts for paying within terms if your suppliers won’t stretch the terms. These strategies may not impact your cash flow immediately, but they can have an overall impact by improving your bottom line, since you are buying product or services at a lower price. Get a good handle on your inventory, turn rate, spoilage, sales trends, etc. so you actually buy smarter.
  4. Evaluate Profit Margins and Turnover Ratios
    We all know that decreasing profit margins are a bad sign, but they can’t be evaluated alone. Turnover ratios are also an important factor. Remember, mega grocery stores and warehouse clubs have low profit margins, but high turnover ratios that result in adequate net income and, more importantly, reasonable cash flow. The key is to look at both your profit margins and turnover rates together because how they interact will ultimately tell you how much cash has flowed into your bank account.
  5. Indirect Overhead Growing with Increase in Sales
    Take a hard look at operations. Are you running as efficiently as you could be? Are your employees productive or can they take on more responsibilities? There are more costs to adding employees than just salary, benefits and taxes. You have equipment, space, recruiting/training time, etc. for each employee you hire. The goal is to increase sales without increasing your fixed overhead. If you find there is nothing you can do to avoid increasing your fixed costs, you might need to re-evaluate your business strategy to determine how you can raise your profit margins to accommodate for your increase.
  6. Warning Signs Outside Your Business
    Every business should use and review a weekly dashboard that includes many of the warning sign financial metrics listed above: gross profit margin, average daily outstanding AR, inventory turns, days payable outstanding, available line of credit, operating profit margin, etc.  But ultimately, there are other warning signs that may not be on your dashboard.   Below is a story from a business who engaged a trusted advisor for an outside perspective.

 A Real-World Example of Heeding the Warning Signs

“Most people under-emphasize the available line of credit,” says Joe Dresnok, a consultant with Management Horizons. “The perfect storm for a company is a down economy, reduced sales and the inability to reduce overhead. When this happens, a company needs to access their credit lines to get through the tough times, and invest in other avenues to generate revenue.”

But during a slow economy, banks will reduce credit lines. One of Joe’s clients had a $300,000 line of credit, of which they had drawn down 1/3.  Joe and his team recommended the client draw down the rest of the credit line. Within 30 days, the bank came to give the “bad news” that they were reducing the company’s credit line to $100,000. The company was happy to report they had already tapped out all $300,000 of the original credit line. “In essence, they preserved $200,000, which translated to staying power.”  In this case, it was definitely worth the cost of that credit to preserve the line.

Each company has its own specific set of measurements (metrics) to help owners understand what to look out for in their financials. (Here are the 8 essential financial metrics we recommend tracking.)  This will at least give you the chance to prevent your company from embodying a quote from Ernest Hemingway:  When asked how one goes bankrupt, he said “Two ways:  Gradually, and then suddenly.”

Watch for the warning signs!

Why Bother with a Financial Plan?

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by Mike Iverson, Numbers Coach

Any competent financial executive will say “a business needs a sound financial plan” to tie the numbers to a business owner’s strategy. But what does that really mean?

Yes, you need a plan. But how you develop the plan will depend on your business objectives. Question #1 should be “Why are you in business?” Your answer may be:

  • “I want a good, stable lifestyle-maintaining business.”
  • “I want to increase my net worth so I can retire early and enjoy the good life.”
  • “I’ll start a ground-breaking business, grow it quickly and sell it so I can move on to the next adventure. I don’t want to get bored!”
  • “I want to create a legacy for my family.”

You might hear yourself in one of the answers above, or maybe you have a unique reason for starting a business. No matter – there are common elements to be explored as you develop your plan, such as sales, marketing, operations, finance, competitors, which products and services to offer, etc.

Create a Plan

I know it sounds like a lot of work. But keep in mind: if you are in business to create a nice income/lifestyle with moderate growth, then you may choose to keep it simple and short. Your financial plan may be just the number of hours at a specified hourly rate that you need to work in order to achieve your goal. Why spend hours on a 40-page plan when two to three pages is enough?

On the other hand, if you plan to grow your business beyond a few people in order to create a net worth exit opportunity or a significant enough business to leave as a legacy to your children, then a more detailed comprehensive plan will be needed. This means the plan should include all of the elements noted above, with enough market data to support your business premise. You’ll need details to specify what exactly it will take to grow your business. Details such as:

  • Monthly financial projections for 12-24 months
  • Annual projections for 3-5 years
  • Assumptions outlined that support projected sales and expenses (pricing, number of clients, new products, marketing initiatives, comparative plans, product costs and more)
  • “What If” scenarios to illustrate the potential ups and downs.

It is easy to think of the plan as the tool. And it is – a well developed plan helps you manage to your expectations. It provides business measures to keep things on track. (Ever hear the old saying, “If you don’t measure it you can’t manage it?”) But often overlooked is the value gained in going through the planning process, whether it’s a simple two page plan or a full-blown book with multiple chapters. The business idea will be refined and honed, and valuable insights achieved.

Ready to Execute

Once the planning process is complete and documented, with a set of financial projections that tie to your vision and help you see what success looks like and what it might cost you in dollars to do it – you’ll be ready to execute your idea! (Don’t forget, however, the plan is dynamic, meaning it will need updating and modifying on a regular basis!)

In the following case study I will illustrate two key elements I have found among successful entrepreneurs who have implemented a planning process:

  1. They start with the end in mind.
  2. Execution, execution, execution…..

Case Study: The Financial Operations Network

I have been fortunate to have been involved with the start-up and launch of a unique business model in my work with a successful serial entrepreneur – Phil Binkow. I have tremendous respect for Phil and his ability to see opportunities and make them happen.

About 10 years ago, Phil had the vision of building a content rich website for financial professionals, specifically in the area of Accounts Payable. Phil produced one of the best business and financial plans that I have seen. He researched his target audience, asking questions about price, content, and their day-to-day challenges. He carefully studied competitors and the industry to find any gaps. He articulated where he felt the business could go and even reached out to competitors as partners.

After reading the plan, I was convinced that here was a business with solid recurring revenue in a niche no one else was serving. We built a comprehensive financial projection which included assumptions for pricing, ramp up of memberships sold, and types of ancillary services and products to sell. The model also helped us understand the potential capital needed to develop and launch the initial site and a future complimentary resource site.

What Determines Success or Failure?

Phil implemented the two key elements in the planning process that I believe can define the difference between success and failure:

  1. He started with the end in mind.
    In other words, he actually has aligned himself with competitors that could ultimately become potential buyers of the Company. Phil knew intuitively that it is better not to go up against the larger, well financed competitors in the industry, but instead, nibble at their Achilles heel with a product or service that they will not pay attention to until its too late. This makes a company a prime acquisition target. He has a game plan for how he would like to exit.
  2. Execution, execution, execution.
    Phil knew his plan had to have the right premise: to solve someone’s problem. But without a solid execution on the part of him and the management team the business would not have taken off. It would still be at the gate announcing its intention to depart.

Now, fast forward to today. Phil successfully exited that business by selling to a strategic buyer and he and his team have started several new business adventures since!

Need some guidance on financial planning for your business? Check out our Financial Planning Tool Kit

The Quest for Capital

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by Michael Iverson

Once upon a (fairly recent) time, a beverage start-up wanted to introduce a brand new product into a local market. The founders funded the company themselves, with help from friends and family. They developed their proof of concept, the packaging, and ran focus groups. They worked hard.

At the same time, they were showing a well-crafted business plan to potential investors. Eventually aligning themselves with a private equity group with similar companies in their portfolio, they were also able to gain management expertise as well. It was a match made in heaven, and all parties were successful.

“The founders understood the process of securing capital financing,” says Mike Iverson, Numbers Coach. “They did it by the book, and it worked out for them.”

The path to obtaining capital financing for any start-up, or even an established business, is not always so clear-cut. And it doesn’t help that creditors have tightened their belts in the past few years. But money is out there and it pays to know exactly what type of capital is best suited for your business.

Here are some capital investment options that you may consider for your business:

  1. Friends and Family – This money is generally in smaller amounts, when a company needs thousands of dollars, but not millions. Terms are favorable because the investors know you and are trying to help. Still, they expect returns slightly north of the stock market.
  2. Angel Investors – Angels will also invest amounts less than $1 million in very early start-ups, or companies unable to get bank financing. “If a CEO can align themselves with an angel with experience in their industry, he or she can take the company to the next level,” says Iverson. Angels, though, usually want a little more involvement in the business, and it just might be more oversight than an entrepreneur is willing to live with. Also, there could be financing terms that specify that the angel gets control of your company if certain milestones are not met. Angel investors are not as prevalent as they were in past years, but they can still be found. “Ask around in your network, ask your banker, and look on the Internet,” says Iverson. Some sites to get you started include:
    http://nationalnetworkofangelinvestors.com
    http://www.angelcapitalassociation.org/
    http://www.angelcapitaleducation.org
  3. Private Equity Groups – These investors use a combination of debt and equity to help a company grow quickly and offer the founder liquidity or an exit plan, if desired. This option is for companies that need $5-7 million. Some groups offer to finance the debt themselves, at a 9 to 13 percent interest rate; others have a relationship with a bank that will provide the loan. These groups want a 25 to 35 percent return on their investment, so they attach warrants, which allow them to convert the debt to equity at some point. Private equity groups are looking for businesses that have cash flow, some positive earnings and have been around for several years. The fast pace and pressure is not for the faint of heart–investors want their returns quickly.
  4. Bank Loans – Banks are not in the business of helping companies grow rapidly. However, if you have seasonal issues or specific equipment purchases that you want to make, banks are a very good option, and pretty much the cheapest way to get money. These loans are for viable, established companies with some earnings.
  5. Small Business Loans – Small Business Investment Companies (SBICs), which are licensed and regulated by the Small Business Administration, are privately owned and managed investment firms that provide venture capital and start-up financing to small businesses, according to the SBA. (www.sba.gov).  “SBA loans provide favorable conditions,” says Amy Carson, senior business development manager with UPS Capital Business Credit, “such as longer terms – up to 25 years for real estate – and equity as low as 10 percent.”
  6. Mezzanine Financing – A combination of debt and equity financing. Basically, investors give money as debt with the option to transfer it to equity in the company if certain milestones aren’t met. One advantage of mezzanine financing is that it’s usually considered equity on the books (rather than debt), so it may be easier for the company to obtain more debt from a bank or other lender.
  7. Venture Capital – For young companies that need $4-5 million and want to grow rapidly, venture capital is a good choice.  VCs usually invest in a proven management team, even if the company itself is less than a year old. VCs want a board seat, they take equity and they will take control of the company if certain milestones aren’t met. In the past, VCs wouldn’t let a founder liquidate any of his money, but in recent years they’ve loosened that rule. These investors are looking for a much bigger return – typically 50-60 percent – because the companies are younger and the risks are higher.
  8. Factoring – A strict factor will lend money based on the amount of accounts receivable coming in on a monthly basis and can help with cash flow. For example, if you have $100 of receivables, they may advance you $80 of that now. When the customer sends the payment, they keep two percent as a payment and pay you the rest. While this is a simple 24% interest rate and similar to the returns expected by private equity investors, the difference is that you are not giving up any ownership in your business.“Banks like tangible assets. We finance the intangibles, the receivables,” says Steven Gold, president of Allied Financial. “Companies can use the money to make payroll, pay vendors, all in lieu of bringing in equity partners, which is the most expensive money.”

The Bottom Line?

The money is out there – but whether or not you’re successful in securing it for your business depends on the path you follow. Says Iverson, “The way a business is capitalized will ultimately predict how fast it will grow.”

Numbers Coach Tip: If you are considering pursuing a bank loan, be sure to check out our Banking Tool Kit to get your financial records ready for review.

Do You Know What This Financial Warning Sign Could Mean For Your Business?

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Owners are often so immersed in the day-to-day details of their businesses that they can’t always see financial warning signs of tough times ahead. If you can’t see the warning signs, you can’t avoid the danger.

At the Numbers Coach, we teach business owners how to spot the warning signs. We closely monitor revenues, receivables and cash flows. These three figures are closely related. Businesses often struggle because of poor cash flow, which usually indicates declining revenues and/or slow collection of business receivables.

12/12 Rate of Change

One of my favorite tools to spot early financial warning signs of potential trouble is a chart called the 12/12 rate of change. During difficult economic conditions, I watch this rate of change closely. If I start to see it slip from 20 percent to 19 or 18 percent, we need to investigate why. If a business continues down that path for too long, the impact will be quite negative.

Let’s take revenues as a simple example. Each month, we calculate total revenues for the past 12 months and we compare it against the same figure for the prior year. Then, we calculate the rate of change from last year to this year. If last year’s 12-month revenue figure is $1 million and this year’s 12-month revenue figure is $1.2 million, we have a 20 percent rate of change. Perhaps you can’t change the revenue figure during tough times, because customers postpone the purchase of your product or service. In that event, it may be possible to lower your expenses and avoid losing money.

The 12/12 rate of change provides a long-term view of your business. It is very useful for spotting changes in a business trend, positive or negative, that have occurred during the past year.

12/12 Rate of Change for Fixed Overhead

To take the analysis a step further, I like to review the 12/12 rate of change for the fixed overhead of a business. It tends to be a leading indicator of future bottom-line results when combined with the 12/12 rate of change for revenues.

Fixed costs are those incurred whether you generate any revenue or not. They include rent and, for many service businesses, staff salaries and benefits.

Let’s imagine a business has a 12/12 rate of change for revenues that shows 5 percent growth. If the 12/12 rate of change for fixed overhead shows 10 percent growth, the business has a problem to address. The business is adding to its fixed overhead at a rate that exceeds top-line revenue growth. That’s a financial warning sign. Because of the long-term nature of the 12/12 rate of change, there is no need for immediate panic. However, if the situation is not remedied, it will pose a threat to the future health of the business.

To investigate further, I look at the trailing 12 months of revenues and fixed overhead expenses – not the rate of change, just gross dollar amounts. Is the revenue increasing or decreasing? We plot points on a graph to develop a clear trend line. We do the same for fixed overhead expenses. If, earlier in the year, you noticed an unhealthy rate of change trend and took corrective action, you can check your progress by reviewing the trailing 12. Using both metrics gives you a better read of the situation you face today.

What type of corrective action can you take? There are several possibilities, including increasing your sales, speeding up your collection cycle, or cutting expenses.  If you are not sure which path is best for your business, contact us for a free consultation.

Option 1 Partners Builds Financial Road Map With Help From the Numbers Coach

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The Company

Option 1 Partners (“O1P”) is a consulting advisory firm started and nurtured by Jackie Flake and Ren Waldron.  O1P provides a full range of consulting services, including recruiting and talent acquisition, Agile transformation services, product strategy, product management, staff augmentation, and coaching. The company specializes in assessing your needs, matching it with teams to meet your vision, and help you build products and analysis for their client’s to successfully scale.  O1P has been providing its high-quality services for over 10 years. 

Situation

In 2025 the O1P team wanted to enhance their understanding of their financial results.  They wanted to use a platform to communicate the company’s key performance indicators (“KPIs”) and educate the leadership team members on what drives the company’s financial results.  The O1P team was missing a financial “road map” that could guide them to make better financial decisions for the company.

Solution: The Numbers Coach Leadership and Numbers NavigatorTM Services

The Numbers Coach (“NC”) financial leadership services were an ideal fit for O1P.  Using NC’s proprietary Numbers NavigatorTM platform, a financial scorecard is created to focus on measurements that drive company’s profits and cash flow critical to sustaining a business.  The scorecard offers the O1P team “at a glance” view of results.  In addition, the Number Navigator’sTM rolling financial forecast gives the O1P team a tool to make critical decisions and see their financial road ahead. 

Mike’s approach to coaching us on how to understand our financial results gives our team the tools to help us navigate our finances successfully and stay focused on our cash flow and investment goals.

~Jackie Flake & Ren Waldron, Co-Founders of Option 1 Partners

Results

NC pulled together financial and non-financial data to complete a scorecard, financial model, and supplemental reporting.  Each quarter the O1P team meets with the Numbers Coach to methodically review results and provide input and analysis from the Numbers NavigatorTM.  After each Numbers Coach meeting, the O1P team can act on activities that improve the company’s bottom line.  Jackie, Ren, and their team can access the Numbers NavigatorTM at any time with its cloud-based delivery platform.

For more information on Option 1 Partners visit www.option1partners.com

To learn more about the Numbers Coach financial leadership services, click here

The Numbers Coach Stitches Together Financial Plan for Fabric Company

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big duck canvas logo

The Company
Big Duck Canvas (“BDC”), founded by Shawn Mitchell, provides high quality fabrics, canvas and threads to both wholesale and retail stores. Their services include customer cut-and-sew fabrics and fabric printing, which adds a customer’s design features to a fabric. BDC distributes its products throughout North America and can be found online at www.bigduckcanvas.com

The Situation
The BDC team wanted to enhance their financial management and reporting. They were looking to create a platform to communicate the company’s key performance indicators (“KPIs”) that drive its financial results and gain a better understanding of their numbers. The BDC team wanted a financial “road map” that could guide them as they made financial decisions regarding strategies for growth.

The Solution: Numbers Coaching
Numbers Coach (“NC”) coaching services was an ideal fit for BDC’s needs. NC developed a financial scorecard focusing on financial drivers that gave the team visibility into the profits and cash flow critical to sustained profitable growth. The scorecard offers an “at a glance” view of results. NC also developed a financial model using its Numbers NavigatorR proprietary software, providing the financial road map for the BDC team to see where they were headed with profits and cash flow. The Numbers NavigatorR provides a rolling forecast, allowing the BDC team to make financial and operational decisions towards the achievement of their goals.

The Results
NC pulled together financial and non-financial data to complete a customized scorecard and a financial model. NC met with the BDC team regularly to review results and provide numbers coaching around the financial results. From the monthly meetings, the BDC team could take actions on activities to improve the company’s bottom line results and implement best practices.

Learn more about our Numbers Coach financial leadership services here

Thermal Support Finds Financial Support with the Numbers Coach

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The Company

Thermal Support (“TS”) is an international source for thermal analysis consumable products started and nurtured by Charles Beine.  TS provides a full range of thermal analysis DSC sample pans and TGA and TG/DTA sample pans. The company’s high-quality aluminum and ceramic pans are the standard as a non-OEM supplier.  TS serves a wide geographic area nationally and internationally, including labs and university research centers.  TS has been providing its high-quality products and support services for over 20 years. 

Situation

In 2024 the TS team wanted to enhance their understanding of their financial results.  They wanted to use a platform that communicated the company’s key performance indicators (“KPIs”) and educate its leadership team members on what drives the company’s financial results.  The TS team was missing a game plan that could guide them to make better financial decisions. Enter Numbers Coach Mike Iverson.

Solution: The Numbers Coach Financial Leadership Services

The Numbers Coach (“NC”) financial leadership services were an ideal fit for TS.  Using NC’s proprietary Numbers NavigatorTM financial platform, a financial scorecard is used to focus on measurements that drive company profits and cash flow critical to sustaining a business.  The scorecard offers the TS team an “at a glance” view of results.  The Number Navigator’sTM rolling financial forecast gives the TS team a tool to make critical decisions and see where they are headed financially. 

Results

NC pulled together financial and non-financial data to complete a scorecard, financial model, and supplemental reporting.  Each quarter NC meets with the TS team to methodically review results and provide input and analysis from the Numbers NavigatorTM.  From each Numbers Coach financial meeting, the TS team can take actions on activities that improve the company’s bottom line results.  Beine and his team can access the Numbers NavigatorTM at any time due to its cloud-based delivery platform.

“Mike’s approach to coaching us on how to drive our financial results gives our team the right tools to help understand how to navigate our finances successfully and stay focused on our cash flow and investment goals.” 

Charles Beine, Founder & CEO

For more information on Thermal Support visit www.thermalsupport.com

To learn more about the Numbers Coach financial leadership services, click here

Get Personal with Your Business Financial Planning

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As a business owner, aligning business financial planning with personal financial goals is essential for your long-term financial health. But how to go about it successfully?

Here are 8 key strategies we recommend:

  1. Separate Finances: Maintain distinct accounts for personal and business finances. This ensures clear tracking of cash flow, expenses, and tax obligations, reducing financial complexity.
  2. Set Clear Goals: Define both personal and business financial objectives. For example, retirement savings, family expenses, and business expansion should align to support overall wealth-building strategies.
  3. Pay Yourself Strategically: Establish a salary or draw of consistent income that the business can support. Avoid withdrawing erratically because it disrupts cash flow and personal budgeting.
  4. Leverage Tax Strategies: Optimize tax planning for both personal and business finances. Utilize deductions, credits, and retirement contributions to reduce taxable income and maximize savings. However, don’t use strategies that may reduce your tax bill, but ultimately cause harm to your cash flow needs.
  5. Build Emergency Funds: Maintain separate emergency reserves for personal and business needs to address unexpected challenges without compromising either. How much to maintain? This is a personal question that relates to 1.) how much risk you are comfortable to take and 2.) how reliable and consistent your cash flow is from the business. You often hear 3-6 months of expenses as reasonable. In some situations, the Numbers Coach recommends over 12 months, due to the unreliability of business cash flow. (See this recent post for more guidance.)
  6. Plan for Retirement: Use tax-advantaged retirement accounts like SEP IRAs or solo 401(k)s. These account allow higher contributions for self-employed individuals, linking personal retirement savings with business success.
  7. Manage Debt Wisely: Balance personal and business debt to avoid over-leveraging. The Numbers Coach philosophy is to minimize the use of debt. When it is used, then prioritize debt repayment while ensuring sufficient liquidity.
  8. Consult Professionals: Work with financial advisors and accountants experienced in both business and personal finance to create a cohesive plan tailored to your goals. But remember, you are the only one who truly cares about your money. As much as your advisors try to have your best interest at heart, it is up to you to learn and know your numbers.

By integrating these aspects into your business and personal financial planning, you can build financial stability, meet personal aspirations, and position your business for long-term success.

Cash Reserve: How Much Is Enough?

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Here at the Numbers Coach, we have often discussed the importance of businesses establishing cash reserves (see this article for more details on how and why). Having a cash reserve gives a business owner a good chance of continuing operations even during very challenging economic times.

The next step is determining how large of a reserve is needed. Clients often ask us how much cash they need to keep in reserve. However, the answer varies from one business to the next. Let me explain.

Are You in a “Nice to Have” or a “Need to Have” Business?

Scenario 1: Non-essential businesses

Some businesses suffer cash flow problems during an economic downturn because their products and services are non-essential. For example, the purchase of golf clubs is easily postponed in the midst of recession. Golf shops, therefore, would be advised to have comparatively large cash reserves to get them through a rough patch. Being fairly conservative in our outlook, we might advise this type of client to build a cash reserve that would cover all business expenses for a period of six to nine months.

A cash reserve of that size affords the business owner a significant amount of financial flexibility. Even in the worst recession, cash receipts don’t come to a screeching halt. Some percentage of customers will have a hard time paying their accounts on time, and sales will suffer a setback. A really bad month might see year-over-year cash receipts decrease by 50 percent. If an owner has nine months’ worth of expenses set aside in cash reserves, he could last through 18 really bad months just using cash reserves. That’s a nice cushion.

Scenario 2: Businesses with choppy, unpredictable cash flows

For example, consulting practices are notorious for having a very good month, in terms of cash receipts, followed by one or more cash-poor months. Whether it’s a good or bad month for cash receipts depends on what projects are in progress, the stage of completion for those projects and when progress payments fall due.

A business like that needs a cash reserve that is large enough to carry it through the predictable condition of low cash receipts, as well as the possibility of economic distress exacerbating the problem. We might advise this type of client to hold nine to twelve months’ expenses in cash reserves.

Scenario 3: Essential businesses

At the other end of the spectrum are businesses that provide products or services that are essential and have rather predictable cash flows. An orthopedics practice is a good example. When a bone is broken, getting it treated promptly is an absolute necessity, no matter what’s going on with the economy. So, revenues of an orthopedics practice could be pretty strong. At the same time, the practice isn’t entirely immune to a struggling economy. Some patients will find it harder to pay their bills on time. A practice like this might need a cash reserve equal to three to six months’ business expenses.

Think Defensively

During a poor economy, a business owner has to manage liquidity by closely monitoring three sources of cash:

  1. bank accounts
  2. cash from outstanding accounts receivable
  3. available lines of credit

Alternately tapping cash reserves and lines of credit further extends the time that the business can operate with a negative cash flow—i.e., business expenses exceed cash receipts.

During a business contraction, banks may withdraw some of their outstanding commitments regarding lines of credit. For this reason, running through all of your cash reserves before tapping credit lines may not be advisable.

What About Factoring?

Finally, customers who are suffering a cash crunch sometimes ask about the possibility of selling part of their accounts receivable—a practice known as factoring. It is a way to accelerate cash receipts without having to dip into cash reserves or lines of credit.

However, factoring can be quite costly depending on your arrangement with the factoring firm and how well your customers pay. The factor may charge you an upfront fee for the amount of receivables sold and include an escrow for a customer account not paid on time. Business owners need to make sure that the fees paid don’t deteriorate their business profits too much.

If your business is suffering cash constraints, or if you foresee the possibility, seek the advice of a financial advisor for a thorough discussion of your options. Let us know how we can help.

Numbers Coach Helps Education Company Communicate Game Plan to Team Leaders

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About The Company

Green Building Education Services (“GBES”) is a leading educational services firm that provides the number 1 LEED exam prep solution since 2007.  GBES has served over 150,000 customers with comprehensive solutions to help people advance their careers with the sustainability credentials.  Not only does GBES help its customers pass the LEED exam to get their credentials, but it also continues to support them with continuing education credits to keep their credentials active and relevant.  GBES also provides Well AP certification exam prep and continuing education.  (To learn more, visit the GBES Website at www.gbes.com)

The Situation

In 2020 the GBES team wanted to enhance understanding across the organization for their financial results.  They wanted to find a platform that could communicate the company’s key performance indicators (“KPI”) and help educate its team leaders on what drives the company’s financial results.  In addition, the GBES team wanted a road map that could guide them as they made financial decisions impacting their growth strategies.

The Solution: Numbers Coach Leadership and Numbers Navigator Services

The Numbers Coach’s financial leadership services were an ideal fit for GBES.  Numbers Coach Mike Iverson developed a financial scorecard to focus on the financial measurements that drive company profits and cash flow critical to sustained profitable growth.  The scorecard offers the GBES team an “at a glance” view of results. The Numbers Coach developed a financial model from its proprietary software, the Numbers NavigatorR .  The software provides a road map for the GBES team to see where they are positioned with profits and cash flow.  In addition, the software’s rolling financial forecast gives the GBES team a tool to make critical decisions and see where they are headed financially.

 Results

The Numbers Coach pulled together financial and non-financial data to complete a scorecard and financial model.  Each month, the Numbers Coach meets with the GBES team to methodically review results and provide the input and analysis from the Numbers NavigatorR software.  From the monthly financial coaching meetings, the GBES team has been able take actions on activities that improve the company’s bottom line results and get the team to all row in the same direction.

For more information on Green Building Education Services visit www.gbes.com

To learn more about the Numbers Coach services, click here

“Mike has become an important part of our team.  His approach to educating us on our financial results gives our team the right tools to help us understand how to navigate our finances successfully and stay focused on our financial goals.”  

Dean D’Angelo, President

Predicting The Next Recession

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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