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

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