Q2

Well, the second quarter is just ending. June 30^th is Monday and July 4^th weekend is NEXT WEEKEND!  2014 is halfway over.  

There is one more business day of the year to bring your business's Q2 objects down the field.  It's just a measuring point, but a very important one.  From a CFO's perspective after Monday can be the ‘lull before the storm’.  It is about to be an extremely busy and important time of year.  

We need to take a deep half-year look - see what we did well, things that we didn’t, and look forward and tune-up the second half year strategy and business plan.

It is halftime. In sport, during halftime the coach and the players review the first half's results, evaluate the competition, and develop a strategy and action plan for the second half.

That's exactly what CFO’s and business owners must do right now.

How did you do during the first half? What were your sales? What was your gross profit? How do they compare to last year's numbers? Compared to plan? How was your customer profitability? Expenses? Overall Profitability? DSO? Inventory levels? Cash in bank? 

It is extremely important to take a critical look your business profit and cash drivers - where you are today and prepare a second-quarter plan.  You need to check the scoreboard and develop what-if’s for the second half of the year. You need to plan your cash needs for the rest of the year and identify efficiency improvements.  You need to provide your team some inspiration.  What’s their mood?  What support do they need? 

Check and, if necessary, reset your mindset!  

So, use this ‘lull before the storm’ to get prepared now.  Take a couple hours and put pen to paper; numbers to Excel.

-         Review your first 2 quarters’ objectives - top 3 overall business goals

-         List some wins for the year so far

-         Begin prepping your team for the month end close – many balance sheet reconciliations and checklist items can get done in advance.  Do them next week.  Get solid numbers fast.

-         Identify all your business drivers (growth, profit, cash flow drivers) and have your historical data formatted.  If you haven’t done so, do.

-         Plan Cash needs now – update your 13 week cash flow forecast

-         Set-up the Q2 Team Meeting to review the scoreboard results and the 2^nd Half-Year Business Plan – set the deadline on your calendar now.  How about July 18th or the 23rd?  Book it  - if you're a big company or a one man show, book it on your calendar.  

-     Also, get prepared to take some time over the fourth of July weekend for some R&R.  It is summer and life is moving fast.  Get outside and enjoy it!

T

Effective Credit Policy, Process, and Procedures

Every organization who extends credit needs to have an effective credit policy, process, and procedure to protect their credit risk and to maximize cash flow. 

Policy = rules, process = activities, procedure = specific instructions.

A better overall process certainly can drive sales and provide better customer value, but remember - profit isn’t true profit until you collect the cash!

Many companies I work with have a credit process, but haven't formalized it as a policy, process, and procedure.  I strongly suggest all policies, processes, procedures be documented, reviewed/understood by your entire team, and used in training.  It's a great way to make significant improvements with operations - think efficiency, standardization, and franchise-like.

Outline your current credit policy, process and procedure; your external credit policies, your internal credit policies, and the credit granting and collection process and procedures.  See my website for example.  Spend time with your team and discuss improvements. 

Forms used, depending on credit limits, generally include: (see my website for some examples)

·        Credit Application summary page with credit decision summary

·        Credit Application

·        Credit Agency report

·        Credit Card Authorization

·        Bank and Trade References

·        Financial statements, tax returns, copy of driver’s license, etc.

Most companies I look at can do a much better job improving cash flow by tightening up their credit policy, process and collection procedures. 

Remember the power of the Days Sales Outstanding ratio (DSO).  In an $8mm company, an improvement from 46 days outstanding to 38 days results with approximately $175,000 of improved cash flow!  Get to 30 days and it’s a $350,000 pick-up in cash.

As one of your cash flow drivers, track your DSO metrics and develop improvement strategies to improve results.

Profit isn’t usable profit until you collect the money. 

Not My Last Bike Ride

Well, I just completed another lap around the sun. I celebrated my 54th birthday on June 4th. I love June 4th. It's a great day. I have always loved the sound of that date  - June 4^th.  I bet everyone feels the same way about their birthday date.

Anyway, I also just love June. The days are the longest, it’s starting to warm up, the leaves have just popped open, the grass is green - Summer vacations are just around the corner.  We can ride bikes almost every day outside.  June is just a great month in Upstate NY.

I find your birthday is a great time to reflect and spend some time thinking. I do the same thing around January 1^st.  It's important to celebrate and really think about the great things we’ve done at this point out lives. We all have great things to celebrate, but we rarely do. 

It's also great time to look forward and think of the things we want to accomplish and the dreams still left in us.  This can get stressful to when you think about the knowns and unknowns, but for me it helps keep me energized.

And think about where we are right now.

I spent some time this morning thinking about that and boiled that thinking down into my morning bike ride the other day.

The past is like my training up into the point. My body is fairly fit. I eat a strict plant based diet. I workout almost every day. Things could be better and they could be worse.  I am where I am based on what I’ve done up to that point. 

The future is the bike ride itself - the route and the expectation of completing the ride.  The improvement in health, the experience of the ride, the feeling of success.

The present is like climbing the hill on Ridge Rd.  About 2 miles long and halfway through the ride. Head down watching my pedals, breathing hard, and dripping sweat.  Barely looking 18 inches beyond my front wheel – seeing the road as it appears in the top part of my view just below my helmet.  Trying to have some conversation with Kurt though mostly in complete oxygen debt.  And then settle in for another 2 mile gentle climb.  

I think that’s where I am now in my life….halfway through and working really hard, enjoying the moment and the day.  Hoping it’s not my last bike ride.

Out of our group ride last Sunday, one of the guys mentioned that one ride will be our last bike ride. That concept scares the shit out of me.  But he is right. One day will be our last day. The obituaries are published every day. Think about that. Not one day has gone by without the obituaries. 

I’m not going to thinking about that - not in June anyway.

Enjoy the day, and I hope everyone makes the most of their laps around the sun.

Carpe diem!

The Month-End Reporting Package

I have been using a monthly reporting package since my first company I started when I was in college.  There wasn’t much to report, but it helped keep us 2 owners focused, on track, and profitable.  The month-end summary transitioned over the years from balance sheet and P&L to charts and graphs and mobile dashboards.

Working with companies of all types and sizes in every industry, the value of the month-end reporting package can be immeasurable. 

It helps keep small business owners focused, accountable, and profitable.  In larger companies, it helps keeps teams aligned, engaged, and driven. 

Some small business owners I work with are secretive with financial information.  They don’t want their team to know how well or poorly they’re doing. I think that's a mistake, but it's their business.  To me, open book financial reporting makes sense.  Either way, the smaller business owner needs to see the information for themselves.

I also like a daily flash report and weekly dashboard.  It’s interesting how dashboards can now easily integrate into your data – producing great information on a real-time basis.  More about dashboards later.

Everyone’s month-end package is different.  Keep it simple and readable.  Too much detail on the income statement, for example, is not helpful.  80/20 your thinking. 

Here’s a quick checklist to help improve yours:

q  Cover page

q  Strategic one page summary – vision, strategic sentence, quarterly goals, etc.

q  CEO, CFO, Sales reports, if applicable

q  Income statement – comparing summary P&L month-to-date and year-to-date to the previous year and to your plan.

q  Balance Sheet – compare to prior year

q  Historical graphs (a picture is a thousand words): segment sales, cost of goods sold, gross profit, top few expense lines, net income.

q  Top 20 customers’ month-to-date and year-to-date Sales, GP$, GP%; Sales Analysis; Geography

q  Top Vendors month-to-date and year-to-date purchases; Top 20 A/P balances

q  Top expense line items with flux comments

q  KPI data and graphs (company specific; sales, gross profit, new customers, lost customers, ASP, revenue/mile, revenue/visit, etc.)

q  Cash flow driver graphs – A/R days, WIP, Inventory days, A/P days; Financial ratios

q  A/R Aging for the month and historical

q  Departmental summaries, if applicable

q  Top 3 priorities from prior month - status

q  Subsequent month top 3 priorities

Use the month-end reporting package as an opportunity to really step up your financial close process with accurate and timely final numbers. 

Again, the reporting package is always company specific, but is a huge opportunity to improve communication and get financial accountability and growth; and better profit and cash flow.

If you need any help developing your monthly financial package, let me know.

In good health and profit,

/jon

Grow or Die

I was talking with one of my clients earlier this week on growing his $50mm energy services company.  These guys process about 14,000 invoices per month with an average invoice ticket of approximately $300.

The only way to grow any business is to grow the number of customers, increase the average sales value, and/or increase the frequency of customer purchase.  That’s it.  

The key is to focus on improving each component.

I have used this simple formula with many types of companies including medical offices, construction companies, HVAC companies, truck parts distributors, job shop manufacturers, and technology resellers.  It's a formula and it works.

Once you understand the power of this, it will help really grow your business. 

I’ve talked about this before, but consider the following formula. 

Revenue

	Number of customers
x	Average sale price
x	Frequency of purchase per year
=	Revenue

I put together a program for one of my client’s segment and had the following results.  Amazing, small growth percentage with geometric results.

Number of customers	1,000	1,226
x Average sale price	400	456
x Frequency of purchase per year	7	7.5
Sales	2,800,000	4,192,920	50%

Notice the geometric growth – a 22% increase in number of customers and 14% increase in average sales with small increase in frequency of purchase gives a 50% increase in revenue. 

For the energy service company I was speaking to earlier this week, we outlined a small increase in the number of customers 7% based on current growth trends and an additional service offering to increase the ASP $100 as follows:

                                                       Current                  Plan          Chg

Number of customers	14,000	15,000	7%
x Average sale price	300	400	33%
x Frequency of purchase per year	12	12	0%
Sales	50,400,000	72,000,000	43%

I will keep you posted on the actual results.

I suggest you look back at the prior 12 months of sales and get your actual numbers.  Don’t make assumptions here.  Most business owners I talk to make assumptions as to the number of customers they have and ASP, but when we get the actual numbers, their assumptions invariably are really wrong.  Dump your invoice register to excel.  De-dup the customers or compare to sales by customer.  I also like to have average invoice value as that may be an easier way for your sales reps to focus on. 

Note - I love the simple trick in Excel to de-dup a list (data menu, remove duplicates), then use the sumif formula.  I use this trick all the time.

Once you have your actual historical data, develop creative strategies / ideas to increase each and EXECUTE a couple strategies.  Test and measure the results.  Optimize, then repeat.

It’s the only way to grow your business.  Customers x ASP x purchase frequency = revenue. 

Think growth and think profit,

/jon

Forecasting Predictable Results

 Besides forecasting and improving cash flow as I’ve been discussing in the last few posts, forecasting predictable results is the other huge problem business owners have. 

Forecasting is alone is difficult, but with predictable results makes the process even harder.  But – business with predictable results are worth much more than a business with a P&L graph that looks like my EKG – AND you’ll will sleep better; you can plan better; and you can focus on really growing and developing your business.

To help forecasting predictable results, follow these steps.

1.     Ensure month-end closing procedure tight and efficient.  The numbers need to be solid and timely.  It is essential to have a solid base. 

2.     Develop a consistent monthly reporting package.  Understand the numbers and what they are telling you. 

3.     Develop and use an Operating Plan with forecasted income statement, balance sheet, and cash flow.  Forecast and track overall profitability and cash flow drivers. 

4.     Analyze customer profitability and profit drivers.  The best way to leverage improvements and maximize profitability is to: analyze, measure, identify underperforming areas and improve those areas.

5.     Look at all processes for efficiency and Value Stream Map each process – again, measure and optimize.

Let’s break each down a little more.

Step 1 - Ensure your month-end processes are tight and efficient

·            Accurate and timely financial information is paramount for your business. 

·            Have a month-end closing book or network folder that is neat and organized.

·            Use a closing checklist for you, your bookkeeper, or your accounting staff – whoever is responsible for the financial statements.  Checklists are great for all standard processes.  See an example here. 

·            Ensure all accounts are up to date and reconciled.  Many business owners only care about monthly profitability and only look at the P&L.  Ensure the balance sheet accounts are accurate and reconciled.  I’ve made some really bad decisions based on bad balance sheet numbers.

·            Develop strategies to close faster.  The timing of issuing your financial statements obviously depends on complexity of your business – but work to improve the timeliness of producing accurate numbers.  I know many companies that close in one business day (I know others that can take 2 weeks).  Work to continually improve.

·            As a small business owner, sit with your bookkeeper or accounting manager and review each financial statement account.  This will engage them in the process.  If a larger company, sit with your CFO and leadership team to review the monthly financial statements.  This is mitigating control is essential and enhances overall participation, buy-in and contribution.

I will take each the other steps planning, policies, and processes for each step in future posts.  

Up Your Cash!

To continue the cash flow discussion from last week.  Predicting cash flow is one of the most difficult thing small and medium size company do.  Last week we looked at a tool which can dramatically help predicting cash flow – the 13 Week Cash Flow Worksheet.  I hope you put this tool to use and continue using it on a weekly basis. 

Now, the question is – how can I improve my business’ cash flow?

There are many techniques and strategies to improve cash flow and many are dependent on your business.  The following are 7 best ways to Up Your Cash:

1. Negotiate better terms with your vendors – payment terms of 40 days vs. 30 days significantly enhances cash flow – a business with vendor related costs of $14mm that extends the average days to pay from 30 to 40 days enhances cash flow by $400,000!
2. Get some cash down up front - This is a great way to have your clients fund projects - not you. 
3. Be careful with your payment terms with customers – balance due on completion is much better than 30 day terms.  If you do extend credit terms, be diligent in your collection practices.  Even slight improvements in day’s sales outstanding (DSO) can be a significant enhancement to cash flow.  If you are a $20mm business with $2.2mm in accounts receivable, a 5-day improvement means a $274,000 incremental increase in cash flow.  Ensure you invoice your customers quickly and develop a credit management strategy and process focuses on reducing DSO.  I recently worked with a client that took a week to invoice their customers.  Employing a couple simple strategies (immediate invoicing, emailing/faxing invoices vs. mailing, and accepting ACH payments vs. customer checks) improved cash flow by over $200,000.  Simple and effective.
4. Manage your inventory better – the same principal as DSO and average days to pay applies to days of inventory on hand.  Any improvement here has serious implications to improve cash flow.
5. Watch your operating expenses.  For most businesses, the most significant operating expense is payroll and payroll related cost, but carefully watching all expenses is imperative.  Any improvement directly enhances cash flow.
6. Use a line of credit at the bank to plug any shortfall of cash flow and allow you to take advantage of vendor programs. Remember taking advantage of quick pay discounts is an excellent way to leverage your cash flow to enhance profitability.  Taking advantage of a 2%10, net 30 discount returns approximately 37% – so it may make sense to tap your line of credit occasionally to take advantage of the vendor discount. 
   
   
   Use the following formula to calculate the cost of not taking a discount.
   
   
   Cost of failing =          Discount %                   X   360
   to take discount          100% - Discount %       Final due date - Discount period
   
   
   So, in the 2%10, net 30 example above the calculation looks like this: .02/.98x360/20 = 37%.  That’s a lot to give up by paying in 30 days instead of 10.
7. Watch what you take out of the business.  Shareholders use the business to pay business related and other expenses, but anything you take out directly reduces cash.

Additional cash generated by using the above techniques can be used to grow the business, to paydown debt, or to take advantage of quick pay vendor discounts.  

Well, have a great Easter, and I hope you are able to spend some time with your family.

And as always – Think Cash Flow!

/jon

News Diet for Me

I was riding my bike on the trainer this morning and flipped on television - something I usually don’t do.  I usually watch a Netflix show or listen to a podcast.  But this morning, I watched the morning news programs.

All the news was all extremely emotional, tragic and sad.  

A Korean ferry capsized with 300 missing high school students, 12 people were killed on Mt Everest, some asshole shooting people in Kansas City was arrested, Ukraine and Russia are getting ready to battle, etc, etc, etc.  (The only good news was a piece I saw was on the 50th anniversary of a Ford Mustang).  The rest of the stories were horrible and personally stressful.  

And there was absolutely nothing I could do to change what happened.

There should be a ‘good news’ news program.

I've concluded that I am going on news diet – starting today.  Why should I stress myself out with all this negativity and overwhelmingly sad stories when there is absolutely nothing I can do about most of it?

I’m just going to put my head in the sand for a while and concentrate on things I can impact – like my health, my relationships, my productively, and my business.  

That seems to make more sense than spending any time focusing on other problems that really don’t impact me and where I cannot help.

Forecasting Cash Flow

Predicting and managing cash can be one of the most difficult things small businesses do. 

If your company is growing, it’s extremely important; we all have seen many growing companies run out of cash due to growing accounts receivable and inventory.  And if your company is not making money, it’s obviously extremely important watching every dollar.  We need to make payroll and keep the business operating.

I like to put in place two process tools that really help any business predict and manage their cash.  The first tool which is essential for most small businesses is to put in place the 13 Week Cash Flow worksheet.  This should be updated, reviewed and revised every week.

The worksheet is simple – it has weekly forecasts for cash receipts and cash disbursements.  The trick twofold:

·        Being able to predict the timing cash receipts

·        Having place holders for planned disbursements

Predicting Cash Receipts

In smaller companies, detail expected payments for all outstanding invoices.  In the most companies, however, due to the size of receivable aging, assumptions must be made based on current expected cash conversion.  Accounts receivable turnover is measured on a weekly basis and strategies are developed and implemented to make improvements.  Small improvements in accounts receivable turnover as a dramatic effect on cash flow. (For example, a $10,000,000 parts distributor with $1,500,000 in accounts receivable, decreasing accounts receivable on average of days 5 days, increases cash approximately $139,000.)

Disbursements

The worksheet needs to contain placeholders for everything.  Bi-weekly payroll, benefits, rent, debt payments, operating and admin expenses, A/P, inventory purchases, cap ex, debt and other payments.  No surprises. 

Each week, review the prior week’s worksheet with actual receipts and disbursements, and recast the next 13 weeks. 

The process is straight forward and over time you get better at your predictions.  Forecasting cash flow in your business makes life much better.  Less stress, more predictability, ability to make commitments, etc. 

See the example of a 13 Week Cash Flow worksheet.

The 2^nd tool is an Operating Plan forecasting the basic financial statements: balance sheet, income statement and statement of cash flow.  The Operating Plan uses some key business drivers as its base. 

I’ll discuss this in more detail later.

As always – Think Profit and Think Cash Flow!

/jon

How Are Your Q1 Goals Progressing?

Now is the time to look at your short list of Q1 goals, and ensure you’re on track to meet your objectives. 

It’s also a good time to book your 'Q1 Review Meeting' on your calendar with just yourself or your team.  I do many of these with business owners I work with early in April.  (I also like to book these a year in advance).

I don’t care how big or small your business is -  I like my clients, either with me or without, to spend most of a full day for their quarterly reviews.  These are extremely important to ensure the big things are getting done.  Also, given the current business environment, it seems like our growth strategies can change at hyper-speed, so quarterly strategy sessions make sense. 

So, schedule these on your calendar – preferably offsite to allow you to focus. 

I like to start off with some deep breathing and a few minutes of basic gratitude discussion or thinking - where we are now, what good things have we recently done with this business, etc.  Stay on the positive side.

After reviewing a few highs and get on the table a few lows of the previous quarter – customers issues, product difficulties, personnel challenges, etc.  This can help identify and prioritize improvement areas.

Review your financial statements (see previous posts) – quarterly income statement compared to last year and to target, balance sheet, big balance sheet accounts, 5-8 key indicators - actual vs. plan, etc.  Also, review the softer attributes of your business.  Spend some time thinking about your shareholders, employees, customers, and vendors. 

Look at your mission and longer term vision.  It’s easy to get caught up in the strategies and operational details.  Ask – what does my business look like in 5 years. 

Write goals for the upcoming quarter.  After looking at your long-term business vision, make a short list of specific 90-day objectives – list the 5-7 most important things to do next quarter.  I put this list on an index card, so it’s easy for me to keep these things in my mind.  I look at this list on a weekly basis to make sure I’m on track and moving the ball forward.

As a business owner, you need to work on high impact projects to continually develop your business.  So, if you’re reading this now, take out your ‘2014 Q1 90-Day Objectives’ on your index card and make sure you’ve made or you’re making progress on these 5-7 most important things to be done by March 31^st.  We all still have 3 weeks left in the quarter to make progress. 

Again, it’s easy to get caught up in the operational part of your business – but make sure you’re moving the ball down the field, getting the 5-7 most critical items done each quarter. 

If you need any help looking at your numbers or want advice or strategies to improve your business processes to build a more profitable and valuable businesses, let me know - I love helping business owners improve their businesses.

As always – Think Profit!

/jon

Look at Your Results Now

We are all hustling to close our financial statements for last year. 

Hopefully by now, most small and medium sized business owners have their internal year-end financials in hand (or half year if you are a June 30 year-end).  If you don't have yours completed, get them done as soon as possible.

January is a great time to look at your numbers. 

First, ensure all month-end procedures are complete and all balance sheet and income statement accounts are completely reconciled.  Solid closing procedures ensure timely and accurate month-end numbers.  If this is an issue for your company, definitely make this an improvement goal for this year.  A quick, accurate close is essential to run your company effectively.  It’s impossible to make smart decisions without accurate numbers.

Spend time now reviewing the income statement and the balance sheet.

Monthly most business owners compare actual month-to-date and year-to-date results to budget and to prior year. 

At year end, it is a great time to look at other key statistics as well.  

For most businesses, I like to look at:

• Number of invoices for the year.
• Average invoice amount – calculated: revenue ÷ number of invoices.
• Number of customers that bought from you last year.
• Average revenue per customer – calculated: revenue ÷ number of customers.
• Transactions per customer – calculated: revenue ÷  number of customer ÷  average revenue per customer.

· 

Once you have these actual numbers, drop them into a spreadsheet as follows:

Basic Business Model	Actual per Year	Next Year Plan
Leads		7,500
Conversion Rate		80%
Customers	5,550	6,000
Transactions per year	2.00	3.00
Average revenue per invoice	$        474.00	$        525.00
Revenue	5,261,400	9,450,000
Margin	34.0%	35.0%
Gross Profit	$    1,788,876	$    3,307,500
SG&A	$    1,431,101	$    1,431,101
Net income	$      357,775	$    1,876,399

Note that small improvements in number of leads, conversion rate, number of transactions per customer, and average transaction value have a huge increase in profitability.

Also, look at sales and gross margin by business segment and by customer.  Several techniques can be used to including summarizing customer data in a matrix as follows.

  

Work to move customers from the LV/LM quadrant.

Also, business owners need to review their balance sheet.  Many small and medium sized business owners skip or skim over the balance sheet.  Remember, the balance sheet is a snapshot in time of what your company owns and owes. 

Important items on the balance sheet include leverage ratios, accounts receivable turnover, inventory turnover, and accounts payable payment days.  All are straight forward calculations.

Note the power of cash flow with the follow example:

If you are a $20mm business with $2.2mm in accounts receivable, a 5-day improvement in receivable turnover means a $274,000 incremental increase in cash flow. 

Several strategies can be employed to improve turnover statistics.

This is also great time to take another look at your upcoming year’s strategic plan and operating forecasts.  Consider using some of these techniques to set monthly targets and goals.

If you need any help looking at your numbers, let me know - I love helping business owners improve their businesses.

As always – Think Profit!

/jon