How could your business benefit by having more Cash?
Do you know where Cash may be hiding in your business?
What do you need to measure that will improve your Cash?
Any business that has been in business for a period of time has been successful. They have overcome competitors, cash shortages, family or employee issues and have survived to carve out a business where they deliver quality products and services to key customers. Yet, many businesses desire to grow to the next level. But they’re stuck, not making that break-through. And we’ve found in those cases it’s not just that they’ve lost momentum, they might be unsure or don’t have a clear path regarding what to do and how to get there. They may not track essential key metrics or understand the key levers for growth in their business.
After working with nearly 100 businesses and hearing from Vistage members across the country, I’ve found there are 3 key areas that need critical attention to achieve more effective and profitable growth – Cash, Contribution Margin and Core Profitability. Understanding these areas, how they are measured, and how to improve them helps businesses move to the next level.
First, there is Cash. While everyone seems to focus on Cash - particularly the daily incoming and outgoing, there is less attention paid to focus on the longer term - Assets that could be better utilized converted to Cash – either permanently or on a timely basis.
For instance, we have seen several companies that carried significant amounts of life insurance that was no longer needed. One company had $400k and another $700k in excess coverage that could be converted to Cash for growth.
Another key area is non-productive revenue producing assets. For manufacturers and distributors this is inventory. We normally rank the entire inventory by days on hand – which is more of a true indictor of where action can be taken. It’s surprising for Owners to realize that they often have 6 months to one-year supply of many items. In some cases, we see items with a multi-year supply. We normally sell, kit, return to vendor, discount, scrap, or otherwise convert these to generate significant cash to invest in growth. For staffing or consulting businesses, where employees are the primary generators of Revenue and margin rather than products, we use data to effectively measure, compare Talent v. Cost, and utilization factors to determine where the next efforts should be focused. In addition, we measure the risk attitude in the business, converting subjective areas to objective measurements. Empirical data is essential to making timely and informed decisions for the health of the business.
As part of a Net Working Capital (NWC) review we also look closely at Accounts Receivable and Accounts Payable. Often, businesses collect slow and pay fast. By measuring these accurately, we can quantify the amount of excess Cash in NWC and show Owners how to retrieve this Cash and invest in growth. Most of the time the internal process is hindering their ability to accurately and timely invoice and collect from key customers. Many times, the value of this improvement is $500k - $5M in opportunity to fund growth.
Second is Contribution Margin. Many businesses do not have a good understanding of the profitability of the next sale. This is because the financial statements are historic in nature and are designed for external users such as investors and lenders, not the Owners managing the business every day. Businesses benefit by simply separating the cost structure into fixed and variable components and calculate how the next sale impacts profitability. Now, leadership can have real data that can be used to adjust pricing to enter new markets, negotiate better pricing with existing customers and understand the internal levers that can be used to flex the business and grow profitability. Its also useful to design incentive and compensation plans that align the staff’s (sales, management, etc.) financial interests with those of the Owner.
The third area which parallels Contribution Margin is Core Profitability. Again, the financial statements used by most businesses do not show the profitability of each core segment or product / service offering. By capturing and reporting on this data, leadership can better understand how the business makes money and how it can optimize for profitable growth. Contribution drivers can be measured, and positive action can be taken. For example, if a business has product and service offerings, the leadership team needs to know the true profitability of each major offering and how it impacts the others. Armed with this new information, businesses can package certain products and services together more profitability, sell better to existing customers and define specific pricing and delivery options for new customers and channels, creating increased value. This is nearly impossible to do effectively without understanding the true profitability of each major offering. The results can be positive and significant.
In some instances, businesses have exited certain low profit lines of business and entered new more profitable areas or expanded profitable offerings deeper into existing channels. Before knowing the true profitability by segment, this was guess work, at best. Equipped with empirical data and analysis, the Owner can be proactive rather than reactive, which is itself a growth lever.
Generating Cash from the existing business and managing Net Working Capital better, understanding the profitability of the next sale through Contribution Margin, and knowing the Core Profitability by business segment provides the leadership team and the Owner the key metrics and the best applied key levers to grow the business more profitability and reach the next level.
Bob Webb, CPA is the Founder of Robert L Webb & Associates, an interim management firm specializing in privately owned and family businesses with the desire to improve. He is also the Chief Manager and Co-Founder of BlueRiver Partners, LLC, a broad-based business management and consulting firm. Their goals are to transform business leaders, their firms and communities into profitable, sustainable and desirable places to work, live and have a multi- generational positive impact. Bob specializes in leading businesses seeking change through finance, operations and organizational improvements and has deep experience as CEO, CFO, COO and numerous consulting and Board positions.