“Revenue is vanity, profit is sanity, and cash flow is king.”
Verne Harnish
I had a conversation last week where an owner was lamenting his relationship with his bank. The bank just “didn’t get it.” They were always hassling him and asking him for reports that he didn’t think showed the true financial health of his organization. I could see how he got here.
The business has thrived on gut and bank balance for years, but now the size and scale of the company was creating complexity where a higher financial acumen and attention to detail was needed. Just what every entrepreneur wants to do, right?
It’s alarming how many owners and CEOs have only a vague idea how their company makes money and where the challenges and opportunities lie. Yes, they can look at the bottom line and how much money is in the bank today but they have no idea how money comes in and ultimately flows through the company.
“I’ll find out when the quarterly report comes out if we made any money.” WHAT? That’s crazy.
Of course, that is “they” and that is not “you.” Or is it?
Here’s a set of financial keys to understanding how you make money. This is not exhaustive; this is just a list of questions I’ve asked and been met by blank stares from owners on the other side of the table. This is enough to wet your whistle and get you thinking about the right financial levers inside your business.
1.Revenue
What is the cadence of your revenue? Are there patterns throughout the year? Who or what generates it and how is it generated?
2. Profit
Do you know which products and services are the most profitable and contribute the most to your bottom line?
Do you have an accurate way to measure each product or service so you can calculate the answer from above in an easy way on a daily, monthly, quarterly basis?
3. Cash Flow
This is a Verne Harnish Strategy from his book “Scaling Up” focusing on 1% Cash Flow Levers. If you increased or decreased the list below by 1%, what would the impact on your business be?
Once you know your 1% variables you can play with the numbers and increase or decrease by any multiple to see the total impact. What if you took a 5% price increase? How would that affect your bottom line? What if your outstanding accounts receivable was reduced by ten days? How would that affect cash flow?
4. Debt
What’s your debt philosophy? Do you have one? How do you know you are within the right parameters for your business in your industry and your risk tolerance?
5. Scorecard and Reporting
What is important enough that you track it on a daily, weekly, monthly, quarterly, annual basis?
What is winning? When is something a red or yellow flag that needs to be looked at deeper?
How do you make decisions based upon the information you track?
If in reading this and there are gaps here, START FIGURING IT OUT. Your banker isn’t stupid, you just don’t understand his position. He knows more about your finances than you do. He shouldn’t. You should. Get your butt over to your financial leader, accountants office, or outsource a CFO and get your financial Acumen cranked up. You are one bad decision or bad economy away from catastrophic loss.
Don’t lose because you don’t know.