7 Key Financial Drivers Of Profit And Cash Flow

Here’s the numbers:

1. Revenue growth percentage
   
   Most people think selling more is the way to fix a cash flow problem. Selling more can actually make cash flow problems worse. When you make a sale you need to ‘fund’ that sale, i.e. you need to pay for the stock / labour to deliver the sale - sometimes well before you’ve been paid by your customer. If you have a cash flow problem prior to sales growth it will get worse if you don’t concentrate on the other ‘drivers’.
   
2. Price change percentage
   
   This means a price increase, decrease, or discount. Many small business owners think they can’t increase prices because they will lose customers. You can’t keep selling at the same price for years, absorbing increased costs, and be profitable. Most people understand prices go up. Wages and fuel go up constantly. You must monitor margins to see when it’s time to increase prices.
   
   It’s reasonable to factor a small, regular increase into contracts. Use the opportunity of supplier increases to pass it on to customers. You don’t have to advertise that you’ve increased prices. CPI ranges around 2-3% and is hardly noticeable. If you don’t increase prices regularly, you will notice it when gross profit has reduced by 10% after years selling at the same price.
   
3. Cost of coods (COGs) percentage
   
   This ‘driver’ is probably the most impactful. A small change here can have as much impact as a large increase in revenue. When you sell more you incur more costs, stock, customers time to pay and jobs in progress prior to invoicing. When you reduce COGS it goes straight to your bottom line! Put aside time to focus attention on reducing COGs and achieving efficiencies.
   
4. Overheads percentage
   
   Overheads are different to COGs, they occur all the time, e.g. rent, wages etc. COGs generally occur when you sell something, like a product or service. Overheads can ‘eat away’ at profitability if not kept in check. There’s one word for the solution here ‘budget’. There’s no better control than to put a budget into your accounting system and report every month on actual versus budget. You can quickly identify issues and fix them to save yourself thousands of dollars rather than leaving it to the end of financial year, for tax accounts.
   
5. Accounts receivable days
   
   This is the number of days ‘on average’ customers are taking to pay, if offered credit terms. This is different from the terms offered, e.g. 30 days. It’s not uncommon to see this result up to 120 days. There’s many ways to get customers to pay on time and regular efficient follow ups is one.
   
6. Accounts payable days
   
   This is the number of days ‘on average’ taken to pay suppliers, if terms are given. It’s common to see this number at less than the Accounts Receivable Days number. This means suppliers are paid quicker than collections from customers. Not many people like chasing money, but are easily prodded into paying before terms allow. In this scenario - cash is going out to suppliers faster than it’s coming in from customers - result cash squeeze!
   
7. Inventory and work in progress days
   
   Inventory Days is the number of days ‘on average’ stock sits in store waiting to be sold, Work in Progress Days is the number of days jobs are in progress prior to invoicing. Think of stock as dollar bills piled up on the stock room floor, and Work in Progress as dollar bills piled up on the work room floor! You need to have stock ready to sell when customers are ready to buy, but not for too long - sucking up working capital. Sales forecasts and managing customer requirements is one way to minimize Inventory Days.
   
   

   Work in Progress is made up of wages paid to staff / contract labour and materials on jobs. The longer it takes to complete jobs and invoice, the more working capital is needed. Speeding up job management and reducing Work in Progress days will have a positive impact on cash. A great way to speed up jobs is to use systems, checklists and templates ensuring consistent quality. These tools reduce mistakes and wasted time. Improved customer satisfaction also speeds up payment.

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