How to Maximize Financial Performance and Enhance Business Valuation
In our Fall 2019 issue, business advisor Phil Symchych started a discussion on the ‘Six Keys to Sustainable Business Growth,’ which has inspired a series. In his fifth article of the series, he looks at the financial performance and business valuation. and what it means for your business.
When we were kids growing up in small town Manitoba, my mom had two words of advice, er, orders, for us. “Get outside!” So we did. We played every sport possible outside, summer and winter. Our favorite was street hockey because we could play it year-round. And whenever we played, wherever we played, we always kept score.
Do you know the score in your business? Before we go on, do you know how much was sold yesterday, how much was produced, and what your cash position is? Does your management team—across the board—get this same information every day? Do you have a weekly meeting on last week’s sales, production, and cash results so you can discuss how to improve them this week?
Today, it’s more important than ever for business leaders to know the score in their business. As a leader, if you’re relying solely on your monthly financial statements to see the score, you’re missing the game. You’re not in real-time. It’s impossible to make timely decisions when you don’t have timely information. Important activities and measurable results are occurring all around you.
The most consistent results I’ve created for clients—regardless of industry—are when I help them to measure and understand their daily and weekly numbers in three key areas: sales, production, and cashflow. These numbers are the highest level of what is commonly called a Flash Report. When you’re managing your business on a weekly—or daily—basis with a Flash Report, you’re in control of your business.
Let’s look at each of these. Sales is about how much was sold yesterday, last week, and the total sales backlog. The next level of sales analysis is to examine which products and services are selling and why? Which marketing activities or salespeople are driving the best results, and why? What are the margins and the payment terms, because these impact cash flow? How can we improve?
Now, let’s look at production. Whether you’re a manufacturer or a service company, your people generate products, services, billable hours, or projects every day. How much was produced yesterday and last week? What were the daily production levels, variations, and why? How can we improve?
Finally, look at cash flow. The most important factor of cash flow is velocity. You need to be collecting more cash faster than you’re paying it out. This isn’t obvious from your monthly income statement that measures revenues and expenses on an accrual basis and totally ignores cashflow. It’s not obvious from your balance sheet either. Lots of profitable companies, especially high growth companies, run out of cash, much to their—but not their banker’s—surprise.
An important metric is what I call total days to cash, that is how long it takes to convert your cash outlays into cash inflow. You pay your employees every two weeks and your suppliers monthly. You create inventory (that sits around for a while) or provide a service that is sold and delivered. Then, it’s invoiced. Eventually, you get paid. This whole process takes much longer than most people think. What is your total days to cash?
The keys to improving cash flow are get paid faster, reduce inventory, and increase specific order production speed.
When you have your weekly Flash meetings with your sales, production, and finance managers together at the same time discussing the same data, you’ll be on your road to making better decisions, faster. This simple yet powerful management process will improve your results. And just like we know when we put the puck in the net, you’ll know when your decisions are improving performance, because you’ll know the score every day.