The 137 Process (Part 1: Awareness)

From Awareness to Action: Building Business Cash Flow

The word ‘process’ is defined as a series of actions or steps taken in order to achieve a particular end. As a business owner, your targeted objective is this particular end.

Most businesses struggle to have enough cash. However, we’ve developed a process that helps businesses build cash flow so they have enough to do what they need to do, when they need to do it, to survive and thrive.

In this blog, we’ll walk you through the first part of our three-step process.

The Steps

Part 1: From Awareness

1. The Business Reflection… Decision Making

2. Running a Business… Not What You Might Think

3. Looking at Your Business… Not 1, But 3

4. Separating Fact From Fiction… Only 2

5. Knowing What to Do and When to Do It… Reporting Rhythms

Part 1: From Awareness

Step 1: The Business Reflection… Decision Making

What to Know:

Your business is a reflection of the choices you have made, are making, and will make in the future. If you want different results, you will need to make different decisions.

Decisions have consequences.

• Good decisions are rewarded.

• Bad decisions are punished.

What to Remember:

IF…you can’t interpret your numbers and understand the story they are telling you.

IF…you aren’t measuring your performance, productivity and profitability, accurately and effectively.

IF…you can’t identify what threatens your survival.

THEN…you are forced to guess when faced with making critical choices.

AND…guessing leads to wasted time, effort and money. Wasted resources lead to struggles and all too often, business failure.

What to Do:

1. Get accurate, complete and timely financial reports.

2. Interpret your numbers and understand the story they are telling you.

3. Use the information to make informed business decisions, and avoid guessing about what to do.

Step 2: Running a Business… Not What You Might Think

What to Know:

Running a business is not the same thing as producing a product, or providing a service. The difference is being anchored in financial reality.

What to Remember:

To run a business like a business means:

• Being able to speak the language of business (numbers) so you can communicate effectively.

• Keeping score so you know how you are really doing in business, and

• Creating a roadmap that will guide you from where you are today to where you want to be tomorrow.

What to Do:

1. Learn to read financial statements

2. Develop a financial scorecard to track your activity and results

3. Create actionable checklists to guide your business.

Step 3: Looking at Your Business… Not 1, But 3

What to Know:

Every business should be viewed from three perspectives:

1. Growth

2. Profit

3. Liquidity

There is not one bottom line in business—there are three. Each bottom line corresponds to one of the financial statements.

1. Return on Assets (ROA) – Balance Sheet

2. Net Profit Before Taxes (NPBT) – Income Statement

3. Operating Cash Flow (OCF) – Cash Flow Statement

What to Remember:

The overriding objective of business is to:

• Leverage assets into profit

• Turn profit into cash, and

• Use the cash to grow the business and build wealth.

WHAT TO DO:

1. Use the DuPont Formula to calculate, analyze and evaluate your returns.

2. Use this scale to track your net profit before tax:

• 10% - 15% is your target range

• 5% is your ‘red flag’ warning 

• Less than 5% is your critical, life survival mode

1. Use the two main financial ratios banks use to determine your creditworthiness:

• Current ratio

• Quick ratio

Step 4: Separating Fact from Fiction… Only 2

What to Know:

Separate fact from fiction in your numbers in order to transform your financial data into actionable information. The one thing no business owner can ever afford is to fool themselves.

What to Remember:

The only indisputable facts in any set of financials are the numbers that relate to cash. (SCALING UP! By Verne Harnish) 

There are three fundamental truths that bankers recognize and use to evaluate the performance of a business and determine its creditworthiness:

1. Your profit is an opinion. Data can be manipulated to provide a specific outcome.

2. Your balance sheet, for the most part, is also an opinion; you can amend valuations to produce the desired result.

3. Only your cash and debt balances are facts. (SCALING UP! p.220)

What to Do:

1. Identify and calculate your cash and debt drivers:

• Core capital

• Cash flow (bank formula)

• Operating cash flow

• Marginal cash flow

• Change in cash position

• Liquidity ratios

• Net debt

• Days outstanding – cash conversion cycle

• Working capital (traditional and global calculations)

• Capital asset purchases

• Disbursements, distributions and loans

1. Perform a debt analysis

• Interest payments

• Principal payments

• Amortization schedules

1. Create a Direct Cash Flow Statement (if not provided by your accountant)

Step 5: Knowing What to Do and When to Do It… Reporting Rhythms

What to Know:

The right data at the right time—your numbers are talking; are you listening? (SIMPLE NUMBERS, STRAIGHT TALK, BIG PROFITS! Greg Crabtree)

Getting into a reporting rhythm is often a challenge for business owners. They struggle to know:

1. What reports they are supposed to look at

2. When they are supposed to look at them, and

3. Why they are supposed to look at them. (Greg Crabtree)

What to Remember:

The information you need to make sound business decisions is in your numbers. The problem is that far too many business owners don’t know where to look for it.

If you try to track too many numbers and create too much data, you are likely to get lost in the maze. You have to know how to keep your reporting simple while still being able to recognize a flashing red light that indicates a problem. (Greg Crabtree)

What to Do:

The following checklist can guide you in creating a reporting rhythm you can commit to, and trust to keep you informed and on track:

• Daily—cash balances. How much cash do you have available to fund day-to-day operations?

• Weekly—age reports. Accounts Receivable and Accounts Payable; who owes you money and to whom do you owe?

• Bi-Weekly—cash flow forecast. How much cash do you need to cover payroll and operating expenses in the short run?

• Monthly—tracking your cash and debt drivers. Know where you are at any given moment in time, and in which direction you are moving.

• Quarterly—Cash Flow Story. Measuring your performance, productivity and profitability, accurately and effectively. Variance reports. Quarterly projections.

• Semi-annually—Capital asset and depreciation review and evaluation. Debt analysis; principal and interest payments.

• Annually—historical trend analysis, disbursements, taxes, business model projection.

Key Takeaways from Part 1

Your awareness in building and managing your business cash flow should be centered on developing these skill sets to the best of your ability:

• Decision-making—make informed choices; don’t guess about what you need to do

• Becoming anchored in financial reality—interpret your numbers and understand the story they are telling you

• Analyze and evaluate your business from three perspectives—returns, profit and cash

• Measure your performance, productivity and profitability the way banks do—cash and debt balances are critical

• Get the right financial data, at the right time—learn what to do and when to do it

Conclusion

Proficiency in these skill sets will enable you to move forward confidently in building and managing your business cash flow, and empower you to take the necessary steps to survive and thrive in business.