The 7 Levers to Improve Profits, Cash, and Enterprise Value

Do you have consistent sources of cash, ideally generated internally, to fuel the growth of your business?

You can get by with decent People, Strategy, and Execution, but not a day without Cash.  Since growth sucks cash, cash becomes even more critical as the business scales up. The key is finding ways to generate sufficient profit and cash flow internally, so you don’t have to turn to banks or outside investors to fuel your growth.

“Revenue is vanity, profits are sanity, but cash is king” ~ Alan Miltz

Where is your cash focus?  Do you spend more time focusing on revenue, profits, or cash with your team?  If you are like most business leaders, you focus most on revenue with your management team.  This is understandable as it is easy to understand, and it is the first step in the process.  Additionally, if you do not have revenue, then you will not have profits or cash.  However, many entrepreneurs, leaders, and managers fall in love with revenue.  They chase revenue without an accurate understanding of the implications on profits and cash flow.

This is where the Power of One comes into a play.  This tool was developed by Alan Miltz and his team at the Cash Flow Story.  Alan’s team has demystified the income statement and balance sheet and identified the seven levers management can most effectively impact.  His tool powerfully demonstrates what a one day or one percent change in these drivers will do to profits and cash.

Click here to download a copy of the tool.

This is a powerful tool to educate the management team on the impact of their decisions on profits and cash.

What is cash flow?

The only indisputable facts in any set of financials are the numbers that relate to cash.  Your profit is an opinion; this data point can be manipulated to provide a specific outcome. Your balance sheet is, for the most part, also an opinion; you can amend valuations to produce a desired result.  Remember Enron?  Only your cash and debt balances are facts.  Banks recognize this and use these numbers to determine your performance.  Investors recognize this and use these numbers to determine your valuation.

Cash flow, then, is the change in cash and debt balances across a given period. It is indisputable and easy to calculate.

How much cash did you generate last period?  This is the question you and your executive team should be focused on.

The Power of One

This sample focuses first on cash flow and second on EBIT.  Immediately, you can see where your biggest opportunities lie.  Optimizing one or more of the seven main financial levers available to you will improve cash, EBIT, and Enterprise Value.  Let’s look at each lever.

  • Price: You can increase the price of your goods and services. This has the biggest impact.
  • Volume: You can sell more units at the same price.  Notice in this example that volume is negative to cash.  This company will be better off slowing growth and focusing on pricing power.
  • Cost of goods sold (COGS)/direct costs: You can reduce the price you pay for your raw materials and direct labor.  This is the second biggest driver of increased profits and cash.
  • Overhead expenses: You can reduce your indirect costs. Conventional wisdom points to reducing overhead.  For this company, this may not be a top priority.
  • Accounts receivable: You can collect from your customers faster. Each day’s reduction is worth $115k in annualized cash flow. This may be a priority.
  • Inventory/work in progress: You can reduce the amount of inventory you have on hand and/or the amount of work-in-process.  Here is another nice opportunity to free up cash if inventory days have been growing.
  • Accounts payable: You can slow down the payment of creditors.  This may be an opportunity to work with your partners.

This table shows that a 1% or 1-day reduction across all seven levers would have a positive impact on cash flow of more than $1 million.  In reality, impacting all seven levers at the same time is not feasible.  This is where management must prioritize and set specific goals.

Where Do I Start?

Fill out the Power of One worksheet using your financial information.  Use the worksheet to prioritize opportunities.  Review the blog “Finance for Middle Managers – 4 Easy Opportunities to Generate More Cash for more detail on the following quick ideas.  

  • Move beyond revenue and focus on cash flow as your ultimate measure of success.
  • Understand your organization’s price to volume sensitivity and address the myth that volume can make up for discounting.
  • Better utilize labor as a strategy for improving gross profits.
  • Get paid sooner to unlock cash to scale.
  • Apply these concepts to inventory and work in process.

Then use the dashboard below to report monthly on your progress.

You can download the template here.

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