Revenue Is Vanity, Profit Is Sanity, Cash Flow Is King
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Revenue is Vanity, Profit is Sanity, Cash Flow is King Michael Boggs Simple Numbers Senior Consultant 1 What you will learn: . How to implement cash flow story in your business One page The 3 big The Business The 4 Cash flow financial Cash Flow Power of value chapters quality scorecard Measures one indicator . How banks or investors review your business . Monthly management meeting www.cashflowstory.com 2 8 keys to business success: . Two heads are better than one . Everyone has the right to be heard in a non-threatening way . The truth will be told . Our word is our bond . The needs of the customer come first . There will be no surprises – put the uncomfortable issues on the table . Promote teamwork and leadership . Be proactive corporate citizens This image cannot currently be displayed. www.cashflowstory.com 3 William's Plumbing Products . William's Plumbing Products was founded in 2001 . William's is an importer of plumbing products and distributes to building sites, major construction projects and hardware stores. William's believes they are doing fantastically as Revenue is growing fast and margins are being maintained. Like many CEO’s William does not share the numbers with his team. Marketing and Operations are only aware of Revenue and Margins. Current facilities are trade finance, overdraft and a long term facility secured by internal and external property www.cashflowstory.com 4 William's Plumbing Products Profit & Loss 2015 2016 Balance Sheet 2015 2016 Cash at bank 0 0 Revenue 35,000,000 42,000,000 Accounts receivable 6,712,330 8,630,137 Gross margin 10,500,000 13,020,000 Inventory 10,336,960 14,291,507 Overheads 6,751,140 8,401,150 Current assets 17,049,290 22,921,644 EBIT 3,748,860 4,618,850 Fixed assets 8,500,000 9,500,000 Interest 1,165,900 1,363,480 Total assets 25,549,290 32,421,644 Tax 930,280 1,172,348 Accounts payable 4,028,550 5,557,808 Net profit 1,652,680 2,083,022 Short term debt 5,019,740 7,279,813 Current liabilities 9,048,290 12,837,621 Long term debt 9,000,000 10,000,000 Total liabilities 18,048,290 22,837,621 Share capital 2,001,000 2,001,000 Retained earnings 5,500,000 7,583,022 Total liabs & equity 25,549,290 32,421,644 5 William's Plumbing Products . On a scale of 1 to 10 how would you rate William's Plumbing Products financial performance? . On a Scale of 1 to 10 how do you think the Bank rates William's Plumbing Products financial performance? . What is William's Net Cash Flow for 2016? www.cashflowstory.com 6 Net Cash Flow • On the 1st of January 2016 I have $10,000 in the bank. • On the 31st of December 2016 I have $1,000 in the bank. My Net Cash Flow is -$9,000 Why can’t we apply this logic to our company even if it has multiple bank accounts? www.cashflowstory.com 7 Knowing the score? www.cashflowstory.com 8 No Surprises . Ask yourself do you and your management team know your Cash Flow? . If so, do you know your Quality of Cash Flow ? www.cashflowstory.com 9 Cash Flow Quality Growth Cash Flow Wastage Management Gains www.cashflowstory.com 10 Financial Visibility Cash Flow is impacted by Marketing, Operations & Finance Marketing – Price, Volume, Overheads, Receivables Operations – Purchasing, Inventory/WIP, Utilization, Overheads Finance – Receivables, Payables, Overheads Your Team needs to understand how they impact your Cash Flow www.cashflowstory.com 11 Your Balance Sheet in one Sentence www.cashflowstory.com 12 Your Balance Sheet in one Sentence Last Year www.cashflowstory.com 13 TheThe 4 fourChapters chapters Chapter 1 - Profitability Chapter 2 - Working Capital Chapter 3 - Other Capital Chapter 4 - Funding www.cashflowstory.com 14 Reconciliation of Cash using the 4 Chapters + Cash Flow -Cash Flow Chapter1 -Profit 2,083,022 Chapter 2 - Working Capital -4,343,095 Chapter 3 - Other Capital -1,000,000 Total 2,083,022 -5,343,095 The business needed $3,260,073 of borrowings to fund the gap www.cashflowstory.com 15 The roleThe four of chapters Finance Storyteller www.cashflowstory.com 16 The Funnel Analogy Sustainable Competitive Advantage Marketing Operations Innovation HR Finance www.cashflowstory.com 17 Sustainable Competitive Advantage Sustainable Competitive Advantage H Your SCA IMPORTANCE CUSTOMERS TO IMPORTANCE L H DIFFERENTIATION FROM COMPETITORS www.cashflowstory.com 18 Sustainable Competitive Advantage Strategic Element Example Who is the Core Customer giving superior “John”. Purchasing manager in a large plumbing profits? retailer. 1. Same day delivery Brand Promise that your core 2. No back orders customers value above all else. 3. We’ll never keep you waiting One-Phrase Strategy is our statement to align ‘yes/no’ decisions for every team No waiting! member. Differentiating Activities our core processes to deliver the promise that our competitors won’t or can’t do without great effort or expense. Process 1 Stock forecasting Process 2 Warehouses in key locations in serviced markets Process 3 80:20 rule for stock range Core Customer www.cashflowstory.com 20 How does finance measure your SCA? The four chapters Chapter 1 - Profitability Chapter 2 - Working Capital Chapter 3 - Other Capital Chapter 4 - Funding www.cashflowstory.com 21 Is William’s strategy working? The four chapters Chapter 1 - Profitability Chapter 2 - Working Capital Chapter 3 - Other Capital Chapter 4 - Funding www.cashflowstory.com 22 Why do youThe go four intochapters business? William like so many CEO’s is Profit focused Is Chapter 1 a sufficient indicator of performance?? Is Cash Flow an indicator of performance?? We need a performance measure that covers all 4 chapters www.cashflowstory.com 23 Why do youThe go four intochapters business? In the 1920’s the DuPont Corporation created the Return on Capital concept that is now being used globally as a measure of business performance. The measure is great because it says that Profitability management and Balance Sheet performance are equally important. www.cashflowstory.com 24 DuPont concept of Return on Capital = 17.19% www.cashflowstory.com 25 The ROCE Equation: ROCE is a brilliant measure as it combines Chapter 1, 2 & 3 into one number As management it is critical that over time we ensure that our EBIT is growing at a faster rate than our investment in our Net Operating Assets. www.cashflowstory.com 26 4 ChapterThe four Management chapters Your Profitability and Balance Sheet management are equally important William has outperformed all his Chapter 1 Profitability metrics but he has Cash Flow problems. William has a lazy Balance Sheet due to his poor Chapter 2 Working Capital Management. www.cashflowstory.com 27 ChapterThe 2 Improvementsfour chapters William’s Accounts Receivables increased by over $1.9 million in 2016 and average collections increased from 70 to 75 days The industry average is 60 days What strategies could William implement to reduce his Receivables without impacting negatively on Profitability? www.cashflowstory.com 28 Improving Returns by understanding your Customers Most companies operate under the 80/20 rule. Accounts 80% 20% for of revenues of customers www.cashflowstory.com 29 Improving Returns by understanding your Customers They want They don’t want a relationship a relationship We want a relationship 1 2 We don’t want a relationship 3 4 www.cashflowstory.com 30 What do we do with 3 & 4s? They want They don’t want a relationship a relationship We want a relationship 1 2 We don’t want a relationship 3? 4? www.cashflowstory.com 31 What do we do with 3 & 4s? They want They don’t want a relationship a relationship We want a relationship 1 2 We don’t want Increase Price a relationship Enforce strict terms www.cashflowstory.com 32 What do we do with 1 & 2s? The goal is to identify your blind spots with your 1 and 2 clients and lock them into your business. - Ask these key clients for a wish list (i.e. what do we need to do to at least 1 be equal with your best supplier?) - Provide these clients with your wish list (i.e. what we want from them) - Document a supply chain agreement. 2 www.cashflowstory.com 33 Optimizing Growth KEY POINTS . Clear understanding of what the business is doing . Which quadrant is the business in now, where is it heading and why? . What are the opportunities for the business? . What will the outcomes be for the business . There are options and the answer is ‘it depends’ . This provides a powerful partnership tool www.cashflowstory.com 34 Optimizing Growth Your Growth Strategy EBIT Efficient Expanding NOA Contracting Inefficient www.cashflowstory.com 35 DuPont concept of Return on Capital The four chapters Is 17.19% a good return www.cashflowstory.com 36 Your Balance Sheet in one Sentence Cost of Capital Return on Capital www.cashflowstory.com 37 What is William’s Cost of Capital? • The Capital Asset Pricing Model was invented in the 1950’s and is a means to calculate the Cost of Capital of a business • Cost of Capital combines the Rate of Return required by shareholders with that required by lenders • The cost of Debt and Equity are proportioned at the businesses projected Debt to Capital ratio giving a Weighted Average Cost of Capital (WACC) Cost of Capital Cost of Debt Is the after tax rate at which the business can borrow on a new long term loan Cost of Equity This is harder to calculate objectively It is based upon the rate at which shareholders are compensated after taking the risk of the business into account Cost of Capital Cost of equity is calculated as follows: Risk free rate + (Risk index x Market premium) Rf + (Beta x Premium) The risk free rate is the rate at which we can invest at minimum risk, usually government bond rate.