From Inside the Vault...

4 Processes that Affect your Bottom LIne- The Sales Process

Posted by Bill McDermott on Thu, Jul 21, 2016 @ 10:07 AM

We’re starting a four-part series today, on the four processes that affect your bottom line. They are The Sales Process, The Production Process, The Delivery Process and The Billing and Payment Process.

Today, we’ll talk about your Sales Process.   One of the questions I get asked often is how can I improve my profitability? Everybody wants more, but it’s difficult to obtain because you have to change profitability by changing the variables that drive it.

Let me tell you what I mean. There are some very distinct variables that drive the profitability of your business and I’m going to talk about them in the form of equations.


Leads x Conversion Rate = Customers

If you want to increase your profitability, you can focus on simply getting more leads or increasing your conversion rate.

Example 1: If I increase my leads from 200 to 250 and my conversion rate is 33%, I’ll get 16.5 more new clients if I can maintain conversion rate.

Example 2: Maybe I want to improve my conversion from 33% to 40% on the existing 200 leads I have. If I’m successful, I’ll have 14 more clients because I’m converting more efficiently.


Number of Transactions x Average $ Sale = Revenue

If you want to increase your bottom line, you may want to increase the number of transactions (sales volume) or increase your average $ sale. 

Example 1: If I increase my number of transactions by 20% from 200 to 240 and my average sale if $15,000, then my volume will go up by $600,000 just due to higher activity. 

Example 2: Another way is if I’m happy with doing 200 transactions, but I really want to try to increase my average sale from $15,000 to $30,000, I don’t have to increase my volume, I just go after larger orders and still hit the $600,000 increase.


Revenue x Margin = Profit

You have two margins in your business: your gross profit (before operating expenses) and net profit (after operating expenses).

Example 1: If you want to increase your gross profit margin, you either increase prices or decrease cost of goods (labor and/or materials).

Example 2: If you want to increase your net profit margin, then you have to look at overhead and other operating expenses for places to cut. Sometimes when things are going well, we don’t look as hard as we should for places to cut.


So, where do you start? That’s the fun part. You get to pick! 

  • You can work with your sales people on how to find more leads or improving their conversion rate.
  • You can work with them either on increasing the number of transactions they do in a year or the average dollar sale of each transaction. Doing more volume or going after bigger fish are both good strategies.
  • You can work with your sales people on implementing price increases equal to the perceived value you create in the marketplace.

When you’re making changes in your sales process, I would encourage you to focus on one of these and track your results. Make sure you keep a compelling scorecard that measures the desired change you’re looking to accomplish. That way your sales people know if they’re winning or losing.

When you find the right recipe, using these ingredients, you’re well on your way to impacting your bottom line.




Topics: entrepreneurship, small business, strategic planning, cash flow, profitability coaching, business owners, cash flow planning, growth, profitability, strategy, process

Watch out for These 3 Liquidity Traps in Your Business

Posted by Bill McDermott on Fri, May 27, 2016 @ 13:05 PM

You might be in a growth phase of your business. Growth always requires cash and cash is generally at a premium. Further, there are some traps to be avoided as you grow. Here’s 3 to watch out for. 


1) Excess build up of accounts receivable

It’s normal for your receivables to increase when you grow. However, if you’re not careful, the build up can be excessive if you also experience a slow down in payment from your clients. For every $1 million in revenue, 1 day’s worth of AR is about $2,800. If you’re a $10 million company and you have a slow down of 10 days in your collection period on AR, that’s $280,000 that is sitting in AR that could be sitting in cash. Wouldn’t you rather have all or a substantial amount of that in cash?

To monitor this, calculate your accounts receivable turn. Take annual revenue/AR balance to come up with your receivables turn. To calculate the turn in days, take 360/AR turn). For example, $1 million/$200,000 AR balance is 5x turn. 360/5 =72 days sales in AR.


2) Excess build up of inventory

You can experience the same trap with inventory, or potentially double if you sell the inventory on credit terms and it converts to AR when sold.

To monitor your carrying level of inventory, calculate your inventory by taking your cost of goods sold/inventory balance. To convert it to days take 360/inventory turn.

So, if your cost of goods sold is $8 million and your inventory is $1 million, your inventory turn is 8x. To convert this to days take 360/8 and your have 45 days worth of cost of goods sold inventory.


3) Purchase fixed assets and with cash

You might be a person that likes to pay cash and not borrow money. I get that. But one of the traps that growth company’s experience is not having sufficient cash to meet payroll when that cash has been spent on fixed assets. Generally, you want to match your long term uses of funds (like buying furniture and equipment) with long term sources of funds like loans. You keep your short term sources of funds like cash to handle short term uses like operating expenses, receivables or inventory.

Many business owners have a line of credit for equipment purchases that they fund up throughout the year and then convert it to a term loan. That’s a good way to avoid spending your cash but still making the purchases. 

Growing your business is hard enough all by itself. Don’t fall in to these liquidity traps that make it even harder. Stay connected to your balance sheet and monitor your trends in the financials so you don’t get caught short of cash.

If you’d like more information about profitability coaching tips like this, please contact us and we’ll be happy to set up a time to talk in more detail.

Topics: small business, cash flow, profitability coaching, business owners, cash flow planning, growth, profitability, activity, liquidity

What would Rockefeller Do? 7 Tips to Run Your Business Like A Billionaire

Posted by Bill McDermott on Fri, Apr 22, 2016 @ 09:04 AM

John D. Rockefeller was a famous industrialist and philanthropist. He founded Standard Oil Company and became the world’s richest man controlling 90% of all in the US at its peak. His fortune at his death was $23 billion in today’s dollars. He was also well known for his generosity and donated over $500 million to charities with medical and educational focus throughout his lifetime.


So, how did he do it? For any of us who are thinking about growing our businesses, why not consider one of the most successful Americans in history?   Here are some of the main points of his success:

  1. Too many business owners are busy working “in” the business instead of working “on” the business. It’s important to develop priorities, analyze your success of those priorities in your financials and establish a monthly meeting rhythm to cover your progress towards success.
  2. There should be one critical number that everyone in the company should be focused on to move the company forward. Profit, revenue and cash are all examples.
  3. It’s important to have the right people, doing the right things and doing them right to be effective and efficient. The organization should have a person accountable for every facet of the organization: sales, operations, finance, IT, R&D etc. It’s important that each of these areas have a critical number in their particular area to focus on as well as the one critical number overall.
  4. When you encounter obstacles or roadblocks in your organization, it’s important for the owner to solicit client and employee feedback to accurately assess the issue and resolve it.
  5. It’s important for everyone in the organization to understand what you do and why you do it. Core values and purpose should be alive in every organization.
  6. It’s important to keep score on your success with key performance indicators (KPI’s) so everyone knows if you’re winning or losing on a weekly or monthly basis.
  7. If you’re hitting or not hitting your KPI’s it’s important to understand why. Success or failure is usually a function of the following issues:
  • People
  • Process
  • Strategy
  • Execution

When you can successfully adopt these Rockefeller habits, you are well on your way to building an empire of your own like he did! $23 billion anyone? If you’d like some help getting started contact us for more information.

Topics: balance sheet, debt, entrepreneurship, small business, strategic planning, cash flow, finance, profitability coaching, income statement, business owners, leadership, cash flow planning, growth, profitability, profit & loss statement, execution, people, strategy, process

Eliminating Mistakes: Can My Business Be More Efficient?

Posted by Bill McDermott on Thu, Apr 7, 2016 @ 10:04 AM

Last week we did a deeper dive in to Shortening Cycle Times. This week we’re going to talk about how to eliminate mistakes. No matter what type of business you’re in, we’ve all made mistakes in our sales cycle, production/delivery cycle or billing/payment cycle. As we try to shorten cycle times, that means we’re going faster. Often mistakes occur when that happens. Your sales person quotes the wrong price or doesn’t have updated costs in his quote. Your production people miss the specifications of the client’s product and you’ve created waste. You bill the client for the product but don’t include shipping or freight. All these things have a negative impact on profitability. So, how do we eliminate mistakes?

When things are going good, like when the economy is expanding, there’s lots of business out there and there’s not a lot of pricing pressure or competition, your profit margin typically covers a lot of these inefficiencies.

However, when the economy slows down, everything changes. Customers cut back on spending and you can’t increase prices, or you may even have to lower them. How do you save money?

It’s important to pinpoint the causes or errors. Mistakes are not a sign of incompetence.   Mistakes usually occur because something is wrong with your process. The best way to discover these reasons is to ask the people who do the work. Some questions might be:

  • Are there any physical obstacles contributing to errors?
  • Are co-workers rewarded for quantity or quality?
  • Do co-workers have to interpret anything?

Once you’ve asked your people for input, how do you implement process changes to eliminate mistakes. Some solutions may require significant investment, either people, time or money. However, some may not. So, how do you pick?

My suggestion would be to consider the following:

  • Select solutions that have virtually no cost. If you can fix mistakes for $100 or less, that’s a great deal for you.
  • No new staff, many people will select a solution that requires you to hire staff. I’m not saying that’s a bad idea, but the long-term cost to hire a person is substantial. Plus, there’s no guarantee this person can pay for themselves long term.
  • Choose solutions you can implement in 30-60 days. Try hard not to take on a long-term fix that could end up taking months or even years. Company priorities often change quickly and that could easily downgrade the long term fix you’ve implemented.

Eliminating mistakes can be difficult to tackle, but hopefully these ideas will help you run your business more efficiently in the future. How do you eliminate mistakes in your business?

Topics: entrepreneurship, small business, cash flow, profitability coaching, business owners, growth, profitability, activity, execution, process

Shortening Cycle Times: Can My Business Be More Efficient?

Posted by Bill McDermott on Wed, Mar 30, 2016 @ 11:03 AM

Last week, we had an overview of “3 Tips to Manage The Madness In Your Business.” The first tip was shortening cycle times. Depending on the type of business you’re in, all of us have a sales cycle, delivery cycle and a billing/payment cycle. If you’re a product, manufacturing or contracting company, you also have inventory or work in process, which is included in your production cycle. In theory, if you are able to reduce the amount it takes to sell, make, deliver or collect your business can do more in the same amount of time.   Depending on your strategy and processes, you would choose to improve the cycle that has the most impact on your business either in financial or non-financial terms.

For example, if my strategy is to sell more I would look at the number of sales people I have and determine how many sales calls it takes before I get an order and calculate an average of sales calls to order. If it takes me 3.5 calls to get an order, then shortening my sales cycle 10% would be to improve my sales calls to order to 3.15. Let’s pretend I make 30 calls per month/330 calls per year. At 3.5 calls to an order, I get 94 orders. If I improve my close rate by 10%, then I get 104 orders. If my average order is $50,000, then 10 orders could give me as much as $500,000 in additional revenue for the year.

The same logic can apply to your production, delivery or billing/payment cycles. In my last article we talked about a residential builder shortening his production cycle for building a house from 16 weeks to 14 weeks. In other words, you’re shortening your cycle time by 12.5%. If you build 200 houses per year at the current rate of 16 weeks, by shortening the production cycle time to 12.5%, you could build another 25 homes. If your average profit per home was $25,000, then that increases your gross profit by $500,000 when implemented.

When you decided to go faster, you must be aware of any quality deficiencies on the way. Because you’re asking people or processes to go faster than they have in the past, something is going to change and you have be alert of the outcomes generated because of the change and determine if you are sacrificing quality for quantity.

At this time, it’s probably helpful to establish some key performance indicators (KPI’s) to watch for in your financials. These key performance indicators could be things like revenue per client or sales person, gross profit per client or sales person, labor utilization rate, inventory or receivables turnover are all examples. You should pick the ones you want to focus on. Are you generating the expected results. why or why not? Generally, your ability to go faster will be a result of people being effective and efficient and having the proper processes in place to eliminate mistakes or redundancies or execution. Remember any change in cycle times could take as long as six months to see the impact in your financials so, be sure you give it ample time. What are some things you do to improve cycle times?

Topics: entrepreneurship, small business, strategic planning, cash flow, profitability coaching, business owners, leadership, cash flow planning, growth, profitability, activity, execution, liquidity, process

3 Tips to Manage The Madness In Your Business

Posted by Bill McDermott on Mon, Mar 21, 2016 @ 10:03 AM

We just finished a 3 part series “Teaching Financials to Drive Performance”. The goal was to teach business owners how the impact of their decisions plays out in their financials statements.

However, in order to drive performance you need a clear strategy with process and execution steps built in and then measure your success monthly when you get your numbers. Here are three tips on strategy and execution to drive high performance with in your organization.

  • 1. Shorten cycle times: All of us have a sales cycle, a billing cycle and a payment cycle. Those of us who manufacture have a production and delivery cycle as well. Shortening cycle times means that you are:
  • Selling quicker
  • Billing and collecting payments quicker
  • Producing or delivering quicker

Let’s pretend you’re a residential builder and your normal production cycle is to build a house in 180 days, so you’re able to turn your inventory of houses twice a year. When you reduce your cycle to 150 days, you have reduced your cycle time by 17%. So, if you build 200 houses per year, reducing your cycle time by 30 days means you could build 34 more houses in a year. If your average profit per house was $25,000 that means you could generate potentially another $850,000 in profit by building 34 more houses.

  • 2. Eliminate mistakes:
  • You sell or deliver the wrong product
  • Mistakes on invoices
  • You’re going too fast and making mistakes
  • You don’t have the right processes to minimize mistakes 

Let’s take the same situation of the residential builder. This builder is trying to shorten cycle times and is going faster. However, he puts in the wrong kitchen appliances or the lighting fixtures weren’t the ones on the order. Or the prices quoted to the future owner didn’t include cost increases causing the builder to take a loss on the home. All these mistakes can lead to situations, which actually extend cycle times and potentially create higher costs and lower profit margins because of them.

  • 3. Improve your business model:
  • Compare your business with a competitor
  • Borrow best practices from others
  • Up your technology
  • Play with the channel 

One of the challenges in my business was that it was very transactional in nature for the first five years or so. I implemented a relationship-based approach to my clients where revenue was recurring, which brought me closer to the client and allowed me to provide additional resources that weren’t previously provided. The consequence of that was my clients became “stickier” and the business grew because of it.

It’s important for you to watch the impact of any of these three tips play out in your financials. However, putting any one of these tips in to practice could have significant impact on your financial performance. Remember any tip takes time for the impact to be reflected, so be sure to give it ample time. What are some things you do to improve financial performance? If you have any specific questions, please “Contact Us”.

Topics: interim financials, balance sheet, entrepreneurship, small business, strategic planning, cash flow, finance, profitability coaching, income statement, solutions, business owners, cash flow planning, growth, profitability, profit & loss statement, execution, process

Teaching Financials To Drive Performance: Part 3 The Cash Flow Statement

Posted by Bill McDermott on Wed, Mar 9, 2016 @ 10:03 AM

Our two most recent posts, we’ve discussed that there are 4 critical items to understand your financials. 3 come from the balance sheet (asset quality, liquidity and leverage) and the 4th comes from the income statement (profitability). 

Today, we’re going to differentiate from bottom line profit and cash flow. I was talking to a potential client today who had $3.2 million in bottom line profit last year, but his cash account only increased $850,000.   So, why didn’t his cash account increase by the total amount of his profit? Today, we’re going to talk about that.

The cash flow statement could be the most confusing piece of your financial statements and possibly the least used by management. Here are the important elements of the cash flow statement. I’ll use this business owner in my example. 

Yes, this business owner made $3.2 million in profit, but was the cash flow for the year from the $3.2 million in profit you earned. Cash flow and profit are different.

This company generates cash from sales, but then they have to pay labor and materials for the product they make. They have to pay operating expenses and interest expense on money they borrow. Because they have inventory and fixed assets, they have some short term and long-term debt. They also pay out distributions to shareholders for taxes and other withdrawals. So, even though they made $3.2 million in profit, their cash flow only increased by $1 million.

The controller or CFO of your company will prepare a cash flow statement that tracks the sources (where cash came from) and uses (where cash went) on the cash flow statement. It is broken up in to three sections:

Operating activities: revenue, cost of goods sold and operating expenses with changes in receivables, and accounts payable

Investing activities: changes in fixed assets, interest expenses, and dividends or owners withdrawals

Financing activities: changes in short term or long term debt, paid in capital or common stock

The best way to avoid confusion between cash flow and profit is to think like business owners instead of accountants.

A business owner thinks in cash flow terms not profit terms. They look at revenue when it’s collected and they look at expenses when they have to write the checks. If they run out of money, they borrow from a bank or put the money in themselves.

So, back to our client example: This business collected $50 million from sales (source of cash) but they had to pay for labor and materials for the inventory they sold and operating expenses of $46 million (use of cash). So cash flow from operating activities was $4 million. (50-46=4)

They bought $1 million of fixed assets and used cash to pay down debt and made owners distributions of $1 million each (investing and financing activities). So, cash increased $1 million due to the total of all those activities. (4-1-1-1=1)

The goal of the cash flow statement is to summarize where the business got its cash and what it did with the money. In our example, the cash came from sales and the cash was used to pay cost of goods sold (materials and labor), buy fixed assets and pay down debt.

To get a complete financial picture of the business, a business owner should read all of the financial statements. The balance sheet tells you about your overall financial condition, the profit and loss statement tells you whether you made a profit or not and the cash flow statement shows whether cash flow was positive or negative. A business owner should look at all these reports to get an accurate picture of how the business is doing.

Topics: interim financials, balance sheet, financial statements, entrepreneurship, small business, cash flow, finance, profitability coaching, income statement, business owners, cash flow planning, profitability, profit & loss statement

Teaching Financials to Drive Performance: Part 2 The Profit and Loss Statement

Posted by Bill McDermott on Wed, Mar 2, 2016 @ 14:03 PM

In our last post, we discussed that of the 4 critical items, (Profitability, Asset Quality, Liquidity and Leverage) 3 of them are from the Balance Sheet. The 4th, Profitability is on the Profit and Loss Statement, sometimes called the P&L or the Income Statement.

I have a client that over a five-year period of time grew their gross margin from 30% to 40% and grew revenues from $4 million to almost $10 million. It became a focus to be aware of volume and pricing, the two main things that can drive revenue.

Profitability: Gross profit margin and net profit margin are the two key factors in driving your overall profitability.

Gross profit and gross margin:

  • Gross profit margin is revenue after COGS for a company that manufactures or sells products. It’s after COS, cost of sales for a service business. It’s tracked in dollars (gross margin) or as a percentage of revenue (gross margin).
  • There are two factors that drive revenue, which in turn drive gross profit, price and volume.
  • It’s equally important to know your exact unit cost (labor, materials etc.) for every product or service you sell.
  • You can increase your gross margin by lowering COGS or COS, however it doesn’t have as much impact as an increase in price or volume.
  • The key metric to track your gross profit is the gross margin percentage (gross profit/revenue).
  • Gross margin changes positively or negatively are a function of product mix. Not all products have the same margin. A change in price or volume or a change in COGS or COS will change the gross margin.

The positive changes can be due to an increase in price or volume and costs stay the same or costs are lower. It can also be due to a higher mix of more profitable products sold. To get to the bottom of that, you need reporting that can give you accurate data on these factors.

Net profit and net margin:

  • Net profit margin is gross profit after operating expenses to include interest expense, other income and expense and taxes.
  • However, most companies elect sub chapter S status where taxes flow through to the individual.
  • So, net profit and net margin are more commonly reviewed as profit before taxes or pre tax profit margin.
  • Operating expenses are both fixed and variable. The expenses you can’t control are typically fixed, like rent, utilities, insurance etc.. It’s in your best interest to keep fixed expenses as low as possible. Variable expenses you can control and can increase in growing months or decrease in slow months (advertising or marketing expenses are an example).
  • The key metric to track is the pre tax profit margin (pre tax profit/revenue).
  • If you’re adding expenses at a greater rate than you’re adding gross profit, your pre tax profit and margin would likely decrease.
  • However, if you’re able to add gross profit and hold the line or decrease expenses your net profit margin will go up or stay consistent.

Depending on what areas you want to improve on your profit and loss statement, you will implement strategy or process to address those issues. The strategies that will have the most impact on your success will be those to address increases in revenue (price or volume), COGS issues will be next and operating expenses will be next. If you have questions please feel free to ask them by hitting the contact button at the top of the page.

Topics: interim financials, balance sheet, entrepreneurship, small business, strategic planning, cash flow, finance, profitability coaching, income statement, business owners, taxes, cash flow planning, growth, profitability, profit & loss statement

Teaching Financial Statements to Drive Performance: Part 1 The Balance Sheet

Posted by Bill McDermott on Tue, Feb 23, 2016 @ 14:02 PM

We believe it’s critical for every business owner to know how to manage money once it’s in the business rather than just making sales. And it can be even more impactful if all employees are empowered to know how the decisions they make affect the bottom line and top line of the business. In order to drive performance in your organization, you should have priorities based on the metrics you measure for your business. Those metrics are typically in the areas of profitability, asset quality, liquidity and leverage. (PALL)

I have a client who had a breakout year last year. Accounts receivable doubled, cash declined about 20%, debt increased by $300,000 and equity increased by over $375,000 from profits. It’s fairly easy to look at the balance sheet and determine what went up or down, but the more important question is why and is it a positive trend or negative trend?

First, the balance sheet is more important than the income statement. Three of the four things in PALL (asset quality, liquidity and leverage) are reflected on the balance sheet.

Asset quality:

  • Receivables can go up due to increased revenue or a slow down in collections or a combination.
  • It can also be you have some AR on the books that needs to be written off.
  • The best metric to use to calculate asset quality in AR is the AR turnover ratio. Take your annual revenue/ AR at year-end and you will come up with a number probably between 6 and 12. The higher the number, the faster you’re collecting.
  • To come up with the numbers of day’s sales you have in AR take the number, 8 for example, and divide in to 365 days in a year. You will come up with 45 days sale in AR. (365/8=45 days in AR).
  • When you have revenue growth, but your AR turn stays consistent year to year, the increase in AR is attributable to sales growth, if your turn changes (better or worse) it’s due to changes in your collections.


  • Most business owners measure liquidity in how much cash they have in the bank. Some measure it in working capital (current assets – current liabilities).
  • You’ve likely heard the expression “cash is king.” So, most business owners look at bank balance as a measure of their liquidity.
  • In my example above, the company I mentioned had significant sales growth last year. Growth always requires cash, so if you’re a growing company, cash will always be at premium.
  • You can increase cash by retaining profits, collecting your AR a little faster, paying your trade a little slower, borrowing from a bank or putting money in yourself.
  • The metric most business owners look at is the number of day’s sales in cash. Take your annual revenue and divide by 365 and that will give your daily sales. Then take that number and divide it in to your cash balance. For example, if you have $20,000 in sales per day and you have $140,000 cash in the bank, you have 7 days of sales in cash.  
  • I’ve seen companies with as little as 3-5 days sales in cash and as high as 30 days.


  • With a growing company, to finance your asset growth how much of your own money did you use (net worth or equity) vs. how much of your creditors money did you use (payables and bank loans)?  
  • In my client example above, the company had asset growth of almost $700,000.
  • To finance that they borrowed about $320,000 from lenders and financed the remainder with profits. This company needs to have a few more good years of profit retention to reduce their leverage.
  • The best metric business owners use is the leverage ratio. You take the total debt/total equity to come up with the number. If you have $1.5 million in debt and $500,000 in net worth, your leverage ratio is 3-1. Said another way, you’ve used $3 of debt and $1 of equity to finance your assets.
  • Most banks are comfortable loaning up to about 3-1 leverage, some up to 4-1. Much higher than that and they will refer you to an asset based lender to borrow against your receivables.
  • This is a collateral based loan with a much higher interest rate because of the leverage.   Since you have all the upside in your business, the less leverage (more skin in the game you have), the less perceived risk in loaning to your company from the lender’s point of view.

Depending on what you want to improve on your balance sheet, you will implement a strategy or process to address those issues. Then you will direct your co-workers to focus on specific execution with a goal of improving one or several of these metrics.   If you have questions, please feel free to ask a question by hitting the contact button at the top of the page.

Topics: balance sheet, financial statements, debt, entrepreneurship, small business, strategic planning, cash flow, finance, business owners, growth, profitability, leverage, liquidity

4 Ways to Tell if Your Financial House is in Order

Posted by Bill McDermott on Wed, Feb 17, 2016 @ 10:02 AM

I thought this would be a good follow-up to my last post “5 Things to Know Before You Borrow.

Many of us get an annual physical, the doctor checks us out to see how things look like cholesterol, blood pressure, heart rate and respiration and compare them to last year. We want to manage our physical health to be the best version of ourselves we can be.

You may have just received your year-end financials and started making comparisons to last year, a financial physical. You want to get your financial house in order. So, here are 4 ways to tell if your financial house is in order by giving your company the financial physical I mention. Just remember the acronym, PALL.


Were you profitable last year? If so, did you make more or less profit this year compared to last year? How about gross and net margins? Are the margins up or down as a percentage of revenue? Asking the “what” questions is fine, but take an extra step and ask why? The possibilities include product mix if you sell multiple products, price increases, if you offered discounts or make some concessions. Other options could be your cost of materials or services are going up and you’re not passing those on to your clients.


How are you collecting your receivables or turning your inventory? Are your clients paying within terms or do you have some slow pay clients? If you have inventory, is there some slow moving or no moving inventory that is on your shelves? The more you have in receivables and inventory, the less you have in cash. Remember the saying, “cash is king.” You want to have good carrying levels of receivables and inventory, but keep excess to a minimum.


How much cash do you have on your balance sheet? Is cash up or down against last year and why? Growth always requires cash. So, cash is likely to go down if you’re growing and you’re financing your growth without a line of credit. A good rule of thumb is to have 15-30 days of sales in cash. Most business owners experience cash flow problems because they don’t keep enough cash in the bank. We’re going to talk about leverage in just a moment, but if you don’t have a line of credit and you have slow paying clients, cash could get tight.


How much debt do you have in your company compared to your net worth or shareholders equity. Leverage measures how much skin you have in the game, your net worth, vs how much your creditors have, your total liabilities. If you borrow every time you have cash flow issues, you could wind up with a lot of debt. Remember the 80-20 rule. Banks will start getting heartburn when more than 80% of your company is financed with debt and you only have net worth of 20%. Every company is different, but this a good rule of thumb.

With this information in hand, give your company a financial physical. Then decide what you might want to stop doing, what you might want to start doing and confirm what you want to keep doing. I hope 2016 is a great year of financial health for each of you.


Topics: financial health checkup, balance sheet, debt, entrepreneurship, small business, strategic planning, cash flow, income statement, business health checkup, business owners, cash flow planning, growth, profitability, line of credit, leverage, activity, liquidity