This is the second part of a series that looks at the four core business systems you need to have in place to operate at an optimal level and maximize your internal cash flow from operations. The first part of the series discusses driving internal cash flow to improve profitability, the third looks at making good decisions with solid business information and the fourth examines managing your revenue to plan for growth.
A few years ago, I worked with a controller who was a true numbers person. He sat in front of his computer all day, but didn’t know what was happening in the business. I actually asked him if he could do his job without his computer – and I was completely serious.
He’s actually not all that unique. Many business owners struggle to get their hands in every function of the company. Their entrepreneurial spirit, which is a blessing in so many ways, leads them to put their heads down, figure things out and get things done.
But as your business grows, you need to tap into more data – from the shop floor or job site, to production meetings and the sales team. You need a person who knows finance and operations. A person who understands where in the business’ money is made. A person who jumps in with both feet. A CFO.
Numbers and operations go hand-in-hand, and successful businesses blend the finance, operations and sales functions. You need to focus on the right things – that critical financial information that drives each aspect of your business operations.
Focus on Your Key Drivers
There are always three or four things that generate positive results in a business. You need to figure out what yours are, track them and aggressively manage them. Recognize that these key performance indicators (KPIs) vary greatly by industry. If you’re in manufacturing, they might have something to do with production by shift, materials, inventory, overtime or scrap. If you’re in construction, it might be the daily production of each crew, equipment run time, daily costs or field overtime.
I once found a construction company owner looking out the window at the equipment yard during a meeting. When I asked what was on his mind, he said he was counting trucks. He knew the more trucks that were in the yard, the less money he was making. His KPIs are the number of trucks on job sites, the overtime he pays and the cash he has in the bank – and these drivers are always on his mind.
Think about those things that tell you if you’re being successful and pay attention to them every day. If you’re waiting for accounting reports to make decisions, the data you’re using is 45 days old – and you need to be able to gauge your progress much quicker than that.
Know Where Cash Hides
If you sell or manufacture products, chances are you have extra inventory eating into your precious cash. When you add inventory, you do so with the intent of using it and selling it. Once you spend the cash, you need to sell the product. The faster you do, the more efficient you are at managing your inventory.
Some businesses that are struggling to pay bank loans and other debt have hundreds of thousands of dollars of inventory sitting on their shelves. Do these businesses need to liquidate? Retailers have clearance sales so they don’t hold on to inventory – it’s something you might want to consider. That way you can have more cash to invest in something that you can actually make money on.
Look Beyond the Budget
Budgets have been instrumental in business planning for decades. But long gone are the days of setting a budget in stone at the beginning of the year and expecting it to still make sense in 12 months. A budget is outdated as soon as the ink is dry.
When the economy tanked a few years ago, some businesses learned that annual budgets weren’t as useful as everyone thought. That’s when those businesses supplemented their budgets with rolling forecasts. This forward-looking view of your business allows you to reallocate resources as needed. Forecasts are most often done quarterly for anywhere from four to eight quarters out.
Your budget still serves a purpose, so don’t go scrapping it just yet. It can help you control costs and communicate company performance. Don’t set it and forget about it. Be sure to update it throughout the year.
Manage with Flash Reports
A flash report is compiled daily or weekly. It lists your identified KPIs and shows how you are trending compared to a historical period, which may be as recently as two weeks ago.
One owner I know ran his small business off accounting reports before discovering the power of flash reports. He identified his three KPIs, (sales per day, gross margin per day and inventory over 90 days), then set and measured goals for each of them. Within two years, revenue doubled and profitability increased 500 percent – simply by focusing on those three numbers daily.
One way to strengthen your business is by using the information you have to make better decisions. Use it to look ahead. Act quicker. Make adjustments. Outmaneuver your competition. But none of this is possible if you don’t know how much money you made yesterday – that’s one KPI every business owner should measure.
This article was originally published in The Rea Report, a Rea & Associates print publication, Summer 2012.
Note: This content is accurate as of the date published above and is subject to change. Please seek professional advice before acting on any matter contained in this article.