Improvement Guide

Q2’s Cashflow

1 EXECUTIVE SUMMARY 2

2 PROFIT DOES NOT EQUAL CASH 2

3 MEASURE YOUR “CASH CONVERSION CYCLE” 2

4 THE SEVEN CAUSES OF POOR CASHFLOW 3

5 IT’S NOT A QUICK FIX 4

6 Q2’S CASHFLOW IMPROVEMENT COACHING 4

7 ONGOING MONITORING AND FINE TUNING 5

8 CONCLUSION 5

Table of Contents

Guide

Cashflow Improvement

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1 Executive Summary

Itisimpossibletosuccessfullygrowasabusinessunlessit’sbothprofitableANDgeneratessurpluscashflowonasustainablebasis.

Theabilitytogeneratepositivecashflowyearinandyearoutisessentialforabusinesstobeviableinthelongterm.Inadequatecashflowisasymptomofmanagementproblemsinabusiness,NOTthecause.

Whiletherearesome“quickfixes”toimprovecashflow,forexamplegettingatemporarybankoverdraftordelayingpaymenttosuppliers,thesearebandaids.Amoreintelligentapproachistounderstandthedriversofcashflowinyourbusinessandthenchangeyourprocessestoimprovecashflowonalong-termbasis.

Toimprovebusinesscashflow:

1. Createacashflowforecast2. Understandyourkeycashflowdrivers3. Changeyourbusinessprocesses4. Monitor,measureandfinetune.

2 Profit does NOT equal Cash Manybusinessownersareindisbeliefwhentheyreceivetheirannualfinancialstatementsfromtheiraccountantshowingaprofit(andtaxtopay)fortheyear…“Thebusinesshasnosparecash–soyourfiguresmustbewrong–thereisnowayImadeaprofitandIshouldn’thaveanytaxtopay!”

Profitiscalculatedbymatchingrevenueearnedandtheexpensesincurredinearningthatrevenue.

Cashontheotherhandisisaffectedbyhowlongourcustomerstaketopayus,howlongittakesustopayoursuppliers,whetherwearegrowingasabusiness,whatwearedrawingoutofthebusinessinpersonalspending,ourloanrepayments,ourincometaxpaymentsandthenewassetsweneedtobuy(forexample,anewtruck)fromtimetotime.

Thechartbelowsummarisessomeofthesedifferences:

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Profit Cash

GST �✖ �✔

Loanrepayments �✖ �✔

Interestonloans �✔ �✔

Cashspentonassets �✖ �✔

Cashreceivedfromsaleofassets �✖ �✔

Depreciation �✔ �✖

Thelinkbetweenprofitandcashistiming–knownastheCashConversionCycle.

3 Measure your “Cash Conversion Cycle”

Yourcashconversioncycleisthenumberofdaysittakestorecyclecashinthebusiness.Theshorterthecyclethemoreliquidthebusinessandthebetterthecashflow.

Thecyclestartswhenstockisorderedandwagespaid,itcontinuesthroughtheproductionandservicedeliveryphases.Oncethegoodsaresoldortheserviceisdeliveredaninvoicetothecustomercanberaised,butthecashconversioncycledoesnotrunfullcircleuntilthecustomeractuallypaystheinvoiceinfull.

Businesseswhodonotoffercreditwilloftenhaveashortercashconversioncycle.Butevencashbusinessesmayhaveextendedcyclesifotherbusinessprocessesareinefficient,forexampleproductionprocessesaresloworsuppliertermsunfavourable.

Measuringandreducingyourcashconversioncycleisakeytoimprovingcashflow.Indeed,thousandsofdollars(orhundredsofthousands!)ofcashcanbereleasedtoabusinesswithoutanyadditionalsales…simplybyreducingthecashconversioncycle.

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4 The seven causes of poor cashflow

Therearemanycausesofpoorcashflow.Herearethetopseven:

1. Pooraccountsreceivableprocess-resultingindebtordays(thetimebetweenbillingandbanking)beingtoohigh,stiflingyourcashflow.

2. Accountspayableprocess-areviewofallsuppliers’termsmayidentifywaystoimprovecashfloworjustgetbetterTermsofTrade.

3. Carryingstockfortoolongmeansfullshelvesbutanemptybankaccount.Thisisnodifferentifyou’reaserviceproviderwithworkinprogressthatisyettobebilled.

4. Maybeyourdebt/capitalstructureneedstobereviewed.Perhapsyourdebtshouldbeconsolidatedandpaidoffoveralongerterm.Maybeyouneedtohaveanhonestlookatyourdrawingsfromthebusiness,orthebusinessneedsaninjectionofcapitaltofunditsgrowth.Oftensignificantcashflowandinterestchargeimprovementscanbeachievedwitharegularreviewofexistingdebt.

5. Overheads.Everybusinessshoulddoathoroughreviewofitsoverheadseveryyear.

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6. Lowgrossprofitmarginsisanotherwayofsayingthatyourvariablecostsaretoohigh.Therearemanystrategiesthatyoucanimplementtoimprovemargins.

7. Finally,saleslevelsjusttoolowtosupportoverheadsandothercashdemandsonthebusiness.Thiscomesdowntohowviablethebusinessisrightnow.Ifthebusinessisinhighgrowthmode,andsalesareincreasingrapidly,thenthebusinessneedsfinancetosupportthatgrowth,andweneedtoreviewafinancingplan.Ifthebusinessisn’tingrowthmode,weneedtofocusonhowwegrowsales.

5 It’s not a quick fix Ifyouwanttoloseweightyoucangoonacrashdietandthekgwillcomeoff.Butunlessyoumakesustainablelong-termchangestoyourdiet,theweightwillinevitablyberegained.Quickfixestobusinesscashflowarethesame.Ifyouapplyabandaidyourbusinessislikelytolurchfromonecashflowcrisistoanother,orfailcompletely.

Fixingtheunderlyingcausesofpoorcashflowinyourbusinessneedsadeepunderstandingofyourcashflowdriversandthenthetenacityandcommitmenttoworkonthemuntiltheunderlyingbusinessprocessessupportongoingsustainablecashflow.Thisworkrequiresaplannedandstructuredapproachandusuallytheassistanceofanoutsideexperttoguidetheprocess,andkeepitontrack.

6 Q2’s cashflow improvement coaching

Q2offercashflowimprovementcoachingthatstartswiththepreparationofacashflowforecastandcalculationofthecashconversioncycle.MonthbymonthQ2thensystematicallyworksthroughthesevencausesofpoorcashflowwiththebusinessowner,andbusinessprocessimprovementsareidentifiedandexecutedthroughoutthecoachingprogramme.Areductioninthecashconversioncycle,improvedbusinessprocesses,andimprovedcashflowarethedesiredcoachingoutcomes.

Mostbusinessownersarejusttoobusytobeabletoworkthroughsuchaprocessontheirown.Havinganoutsidecashflowimprovementcoachholdsthebusinessowneraccountable,andcreatesthedisciplineandstructuretoachievelastingresults.

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7 Ongoing monitoring and fine tuning Thedisciplineofpreparinganannualcashflowforecast,enteringyourbudgetintoyouraccountingsoftware,andgeneratingmonthlyreportstomeasureandmonitorisimportanttobusinesssuccess.Continuallymonitoringandimprovingyourcashconversioncyclewillhelpkeepyourbusinesshealthywithsustainablecashflowtofundexpansionandgrowth.

8 Conclusion Adequatecashflowiscriticaltobusinesssurvivalandgrowth.Asystematicapproachisneededtoimprovecashflowonalong-termbasis.Anoutsidecoachcanprovidetheknowledge,commitment,structureandaccountabilitytohelpbusinessownerschangetheunderlyingbusinessprocessesthatwillcreatelastingimprovementsandsustainablecashflow.

To find out more about how Q2 can help, phone 09 222 4448 or email info@Q2.net.nz to set up an obligation-free first meeting.