Posted by eoauckland | November 7, 2013
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?