Numbers People in Action: Finance Analysis
August 18th, 2009
Copyright © 2009 Integrated Profitability TM
A further continuation of the suggestion that came in to “…include a simple but meaningful scenario which you’d have the three Numbers People work through to posting, reporting and interpretation and planning…” The first article set up the simple scenario, the second dealt with Accountants & Bookkeepers, the third with basic Finance reporting. This article focuses on the analysis that Finance does.
The third step for Finance is to provide analysis and interpretation of the numbers. To the extent possible from the general ledger accounts, Finance will dig into changes in the numbers and provide explanations as to what is causing those changes, as well as identifying interconnected events. They use the information they have reported: what the number are and how they have turned out. The analytical stage focuses on explaining the numbers, and their movement, in terms of what is happening with the business creating the numbers.
For example,
● if the expense figure for the snacks has increased, it would be good if sales revenue has also increased. Even better if it has increased at a faster pace.
● if the amount in inventory is increasing, a fall off in sales would help explain what is going on
● if net profit is increasing, a decrease in expense or an increase in revenue would help explain the beneficial outcome
But what if things aren’t moving in expected, or at least hoped for, ways?
Cash Flow: Revenue (Actual, Part 4)-Differentiate Services
July 30th, 2009
Copyright © 2009 Integrated Profitability TM
This is the fourth article on increasing actual revenue to improve your company’s Cash Flow. The last article focused on differentiating products to create opportunities to increase prices or to naturally influence customers toward certain products. This one looks at the same type of opportunities for services.
● Differentiating Service offerings
Similar to differentiating your products, this approach adjusts the level of service that is provided, either as an adjunct to a product (such as extended warranties with differing coverage and differing lengths) or as differing levels of service (as when spas offer a series of more and more complete packages).
Differentiating your service levels usually also has an expense component. More service costs more to deliver–and we will cover that side of the equation in the articles on the expense side of improving Cash Flow. For the revenue side, the better the level of service, the higher the price. The higher the quality of the service, especially in comparison to competitors, the more a premium price may be charged.
Cash Flow: Revenue (Actual, Part 3)- Differentiate Products
July 27th, 2009
Copyright © 2009 Integrated Profitability TM
This is the third article on increasing revenue to improve Cash Flow. The first article in the series covered selling more, the second focusing on pricing opportunities. This article concentrates on tweaking your products and product line to generate opportunities to potentially expand sales, increase prices and/or improve profit margin.
● Differentiating Product offerings
Depending upon your business, you might be able to make small differentiations that naturally encourage customers to buy more. Ever notice at coffee shops and fast food places how the drinks are priced? The small one is priced at $x.xx and then each larger size above is a small fraction higher. How many times do you buy the biggest one because it’s “only 15 cents” more? You don’t need the bigger drink, but it is such a good deal.
Assuming the price of the smallest drink is higher than the cost of the largest drink, this type of pricing makes a lot of sense, for both profitability and especially cash flow. That is: the price of the smallest drink is more than the cost of the beverage in all the sizes. So, if somebody buys the smallest drink, you have the greatest profit margin. If somebody buys the largest drink, you have the greatest cash flow. Either size, you win.
Cash Flow: Revenue (Actual, Part 2)- Increase Prices
July 23rd, 2009
Copyright © 2009 Integrated Profitability TM
This is the second article devoted to improving Cash Flow by increasing actual revenue, as opposed to merely adjusting the timing of revenue. The last article of this series covered increasing sales.
Revenue consists of two pieces:
1) a unit of something (e.g., a product, a service, a period of time)
multiplied by
2) a price
The previous article concentrated on increasing the number of units; this article focuses on increasing prices to improve Cash Flow.
● Increase prices
Every business, market, product/service suite and customer base is different. The ability to increase prices is dependent upon many relative characteristics across all four areas, and how they, at the current moment, are interconnected. For example, who has relative market leverage: buyers or the seller? If you have leverage, there is a better chance you will be able to increase prices, without causing a more-than-offsetting decrease in sales. If not, you don’t.
More importantly, where is your product/service placed in the range of similar offering? How is it perceived by the market? If it is one of high quality, then prices may be able to be increased. If you know that your product and service is the best quality and value in the market, but your customers don’t know it, then you have some marketing homework to do. In order for someone to pay a higher price, he or she most perceive that the product/service is better and deserves the premium.
How does your product/service compare to the competition?
Got Cash Flow? (Part 2 of 2)
July 20th, 2009
Copyright © 2009 Integrated Profitability TM
In the article before our regular blogging got interrupted with “Breaking News” (“Got Cash Flow? (Part 1 of 2)”), revenue and expense information was gathered in order to figure your company’s cash flow. For revenues and expenses, the method of payment was highlighted because it provides insight into ways to improve cash flow. Here is what the table of information might look like:
|
Payment Method |
Revenue ($) |
Rev (%) |
Expense ($) |
Exp (%) |
| Cash | ||||
| Debit Card | ||||
| Pay Pal (or similar) | ||||
| Check | ||||
| Credit Card | ||||
| Government Programs | ||||
| Invoice | ||||
| I.O.U. / Promissory Note | ||||
| Other (describe) | ||||
| Other (describe) | ||||
|
Totals |
($) |
(%) |
($) |
(%) |
The order of the “payment method” is from immediate-cash to much-later-cash. For your business, fill the chart in, adding and taking away payment categories to fit the way your company operates. As you fill in the information, jot down estimates of how long each payment method takes to convert to cash. For revenues, that is how long you are financing (carrying) your customers. For expenses, that is how long your suppliers and creditors are financing you.
As you compile these numbers, do you notice any changes happening over time? Unfortunately, the time it takes revenue to convert to cash naturally increases, while the time it takes expenses to be paid in cash decreases. If both of these trends are happening in your business, your cash flow is getting doubly squeezed. If your cash flow is getting squeezed too hard, let’s talk.
In the meantime, here’s a generic approach to assessing the state of your company’s Cash Flow:
In the News: Two Faces of IOUs
July 16th, 2009
Copyright © 2009 Integrated Profitability TM
Regarding California’s IOUs, there are two more articles in the Contra Costa Times of interest, with the second one being particularly pertinent to the current “Small Business Finance & Profitability” (SBF&P) series on cash flow.
The first article, “Options dwindle for those holding California IOUs” was on page AA1 on Tuesday; July 14, 2009. Taking a more professorial approach, the spokesman for the California treasurer’s office sheds slightly more useful light on the sad financial plight of the State of California:
““The decision by most major banks to not accept IOUs makes them less liquid, makes it more difficult to turn them into cash,” said Tom Dresslar, spokesman for the state treasurer’s office.”
Both phrases say the same thing and he still manages to make it sound like the banks are somehow causing the problem. It would be nice to hear him say that the State of California….well, let’s be honest. It’s not really the State of California that’s the problem: it’s the elected officials who have the job to balance the state’s budget and to manage the state’s financial condition. They aren’t doing either.
In the News: Blame Games
July 13th, 2009
Copyright © 2009 Integrated Profitability TM
Given California’s financial and budget predicament, the press is full of articles about the crisis, its causes, status, what is happening and, more often, what is not happening.
One particular article has something so incredible that, in my opinion, it warranted an interruption in the current series on Cash Flow. It definitely affects cash flow. A short interruption for “Breaking News…”
The article, “Banks’ plan to refuse state IOUs takes heat,” was on page A9 of the Contra Costa Times on July 9, 2009 (Thursday). The focus of the article was on how and when certain banks were going to handle California State’s IOUs. The main thrust was that since the banks have benefited from government bailouts, if they didn’t participate in California’s IOUs then there would be a backlash.
Let’s set the playing field. Not level it—just make sure we know what game we’re playing and what the rules are.
Got Cash Flow? (Part 1 of 2)
July 9th, 2009
Copyright © 2009 Integrated Profitability TM
Is your company generating Cash Flow or Cash Dribble? Does your Cash Flow look like the Amazon? Or a dry wash?
Excellent Flow
If your business is firing on all cylinders and you are drowning in a flood of positive Cash Flow, then STOP READING! Go straight to your favorite sweet shop and treat yourself to your favorite dessert. Do not stop at the gym, do collect your “2-for-1” coupons. You deserve a reward for your outstanding success.
On the other hand, if your Cash Flow isn’t as much as you would like, or you think it should be more, then read on. If your Cash Flow is negative, then definitely continue reading.
If your business’ Cash Flow is:
● overwhelmingly positive,… why are you reading this? You’re supposed to be enjoying your favorite dessert. Get out of here. Unless you’re reading this over a banana split at Fenton’s or another fine establishment—then you’re off the hook.
● trickling along, then now is the perfect time to take action
No Flow
● negative, then late action is better than no action
And finally, if you don’t know your business’ Cash Flow, then you are starting at Square One; which, if you have been in business for some time, is not a good place to be.
Cash Flow: Revenue (Actual)
July 6th, 2009
Copyright © 2009 Integrated Profitability TM
This is the third in the “Cash Flow: Revenue” string of articles and the focus is on ideas to increase Cash Flow on a permanent basis. The first two articles covered temporary, timing ways to increase Cash Flow (“Cash Flow: Revenue (Timing)”) and the grey area between timing and actual improvements (“Cash Flow: Revenue (Grey Area)”).
As mentioned in “Cash Flow (Intro),” the only way to permanently improve Cash Flow over the long-haul is to widen the spread between Revenue and Expense (where both are on an “All-In,” net basis). As long as net-revenues (converted to cash) are increasing faster than net-expenses (paid in cash), the company’s cash flow is improving.
(Note: there are specific relative trends that can cause cash flow to behave counter-intuitively, but we’re going to ignore those for now and perhaps pick them up at a later time.)
How to increase revenue is an age-old question facing businesses, and the full topic is far beyond the scope of this article. While the thoughts below are limited specifically to the revenue side of the Cash Flow equation, the steps are very similar to those taken to increase sales and revenue overall. Here’s the first one:
Cash Flow: Revenue (Grey Area)
June 29th, 2009
Copyright © 2009 Integrated Profitability TM
In “Cash Flow: Revenue (Timing),” we covered ideas on how to improve revenue by making changes in the timing of the receipt of cash. The last example in that article, about influencing the type of payment mode customers use when making purchases, was crossing the line from temporary timing changes into permanent cash flow improvements.
There is a grey area between “Timing” and “Actual” ideas when it comes to improving Cash Flow.
For example, if credit cards cost 5% on average to convert a sale into cash, you might consider offering a discount if the sale is paid for in cash. In this example, a 2% discount would provide a good benefit. Some businesses already do this. Traveling around the country, there are gas stations that differentiate prices based on whether one is paying with cash or with credit. As far as your business is concerned, it all depends on the paying-willingness and flexibility of your unique customer base. How to go about it?
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