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Eight Cash Flow & Profit Drivers
Well... eight plus one BIG extra
In the Entrepreneurial Operating System� (EOS�), one of our sessions covers The 8 Cash Flow Drivers™. Having served as an advisor to over 100 companies, I can tell you that improving cash flow -- and thereby, profits -- is a major concern in almost every business.
So let's look at the eight things that drive cash flow and profits. (A real bonus I've discovered is that there are actually NINE, and the last one, in my opinion, is the best one of them all.)
1. Price. Clearly, charging too little costs us (big time!), but we are frequently timid and hesitant about asking for just the market rate; often even more so if we're providing a premium product or service. My clients are usually amazed when I tell them -- and then show them -- the difference. Across a vast number of transactions, charging a only few cents more -- literally pennies, nickels, and dimes -- per transaction can mean the difference in having a $50,000 loss or a $200,000 profit.
2. C.O.G.S. / Margin. C.O.G.S. (Cost of Goods Sold) is, of course, what we pay for what we sell. Understanding gross margin -- the difference between what we pay for an item and what we sell it for -- is the number one lesson I ask my clients to learn because having a disciplined program to control this factor can do more to drive profits than anything else we do. One of my clients has identified six sub-components of C.O.G.S/margin and implemented what they call "The Big Six Program" to focus everyone's attention on driving costs lower and margins higher. Again, over a vast number of transactions, a big difference is often made by pennies, nickles, and dimes.
3. Ancillary Sales. Very frequently overlooked are the little "add-ons" to the main products/services you sell. One retail chain I worked with made almost all their bottom line profit selling warranties and product protection plans. Others gain huge margins by adding a second item for free, asking the customer to "just pay separate shipping and handling". Having someone focused on making sure every sales person is adding, where possible, ancillary sales can be a huge cash flow and profit driver.
4. Service Time. Many businesses employ lots of people to provide services or install what has been sold. Focusing on average service time, identifying the best practices of your best servicers, and regularly (at least monthly) spending time spreading these best practices to the rest of the team can pay big dividends. One company I worked with created "ABC Company University". They grant "degrees" for completing training and offer boosted incentives to employees achieving top 25% performance rankings.
5. Errors. Mistakes are costly, and very few companies quantify exactly HOW costly they are. As an example, just ONE mistake per day can waste two hours of someone's time. At a loaded cost of $25 per hour, this is almost $12,000 per year! To prevent such expensive errors, "ABC Company University" requires a course on "Top Ten Errors to Avoid At All Costs!", and has recognition programs for those who go months or years without an accident or serious mistake.
6. Compensation / Labor Costs. Second only to C.O.G.S. as the top cost on the P&L statement is labor, which is typically half to one third of all costs. Benchmarking full-time equivalents and driving sales per employee, costs per employee, or some other metric to ensure your total labor costs are competitive is essential to driving this cost down. Assign one person to be the champion of lowering labor costs per unit produced or per service provided.
7. A/R Days. Accounts Receivable ratios can be calculated to "DSO" - the number of days sales outstanding. Keeping DSO as low as possible is essential to optimum cash flow. For example, a company may take, on average, 40 days to collect an account once billed. In a $12,000,000 annual revenue business, having a program to drive this to 30 days would add a one-time boost to cash flow of over $300,000! Doesn't it make sense to have someone watching this number?
8. G&A Expenses. Almost everyone focuses on General and Administrative expenses, and of course they should. Having annual/monthly budgets by location or department, and monitoring them on a monthly basis is the main way to drive this cost lower. And it's such a basic thing that it amazes me how many companies do not do this!
Oh, what have I discovered is number 9? It's the Entrepreneurial Operating System itself. I've been CFO of companies as small as a million dollars in revenue to greater than $50 million. My experience has consistently shown that by far the most important cash flow and profit driver is having a unified leadership team with a clear and shared Vision, gaining Traction through implementing a coordinated system of discipline, and moving forward as a Healthy team.
Whether you use EOS or some other system is, of course, up to you. In EOS, we have a creed that says, "You cannot build a great organization on multiple operating systems. You must choose ONE." If you want to drive cash flows and profits higher and higher, pick a system and commit your team to its execution.
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Upcoming Events
Ken DeWitt to speak to various business groups in the
coming weeks
Wednesday, March 6, 2013Ken will attend Vantage Point Advisors' Spring Lunch Forum at Embassy Suites in Birmingham. The topic for the session is "How To Add Value To Your Business With An Advisory Board". For more information, contact Ellen Glasgow at 205-879-0501.
Thursday, March 28, 2013
Ken will present an entrepreneurial workshop, "How To Turn Your Business Around BEFORE You HAVE To". The event is presented by the Alabama Chapter of the Turnaround Management Association and is open to the public. There will be a nominal registration fee to cover the cost of lunch. Contact Rachael Hodo, Chapter Administrator, at 205-222-3751 for more information.
Tuesday, April 23, 2013
Ken will conduct a free 90-minute webinar, "Are You Running Your Business, Or Is IT Running YOU?". Click here for more information and to register.
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What's EOS™ about?
Watch this three-minute video about why EOS works for
entrepreneurs who want to get more out of their businesses.
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Building Your Business
Links to articles and organizations promoting entrepreneurship and building better businesses
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600 Northshore Drive - Tuscaloosa, Alabama 35406
One Chase Corporate Center, Suite 400 - Birmingham, Alabama 35244
Phone (205) 310-4454
www.DeWittCFO.com |
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Kenneth C. DeWitt,
Founder
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In a recent survey of business owners, 82% said they weren't getting enough from their people. Most owners report that they have good people who just aren't synchronized and working effectively to produce desired results...
"Are You Running Your Business, Or Is IT Running YOU?" Tuesday, April 23, 2013 11:00 am - 12:30 pm
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