Revenue is vanity, profit is sanity and cash flow is king

Alan explaining the benefit of working capital management

Alan Miltz presented to EO Auckland today on the topic of cashflow – driving home the message that a focus on revenue is vanity.  Rather, entrepreneurs should be looking at four ‘chapters’ of their business:

1. Profit (Revenue, COGS, Gross MArgin, Overheads and EBIT)

2. Working Capital (Accounts Receivable, inventory and Accounts Payable)

3. Non Current Asset Utilisation

4. Net Cashflow (change in borrowings + cash in bank)

Creating a scorecard which highlights monthly performance against good/average/bad benchmarks will quickly identify areas of concern.  In particular, watch out for the Marginal Cash Ratio  – the ratio of Gross Margin % to Working Capital %.  Whenever the Gross Margin % is less than the Working Capital %, there will be a cash flow problem.

In this case, focus on the Power of One and ask yourself, what would the Power of One do to your bottom line?  What would 1% change in volume, price, COGS or overheads achieve?  What additional profit would a one day improvement in accounts receivable, inventory turn or accounts payable generate?

Alan Miltz Event: Audience Alan Miltz Event: Alan Miltz IMG_0107