The Ultimate Dashboard Metric

Velocity is the ultimate dashboard metric. The velocity at which your business resources generate free cash flow is the ultimate determination of success.

The realities are simple. If cash flows out faster than in, you must find working capital to replace it. When you can no longer replace it, the business is finished. If cash flows in at a higher velocity than out, you have the opportunity to sustain or grow.

If you measure nothing else, measure and forecast your cash flow. To the extent that you can determine the cash contribution margin of every significant current and planned activity of your business, you have the opportunity to manage your business.

Leading businesses use this information to either fix, fire or exploit their product lines and services for maximum near- and long-term value.

One of my clients doubled their profits within 6 months by using this simple dashboard metric. This set the stage for a doubling in top line revenues over a period of just 48 months.

Accounts Receivable as a Loss

Two companies I worked with, for example, were able to take steps to recapture $150,000 and $900,000 per year respectively by being more aggressive with accounts receivable, more selective with credit limits and by monitoring and managing cash as a “business” within the business.

How much money are you losing by giving interest free loans to your customers – $150,000 to $900,000 per year?  This is a valid target for cost reduction and profit improvement.

Take a quick look at the accounts receivable line on your balance sheet. What is that amount?  Now look at the line item(s) on your financial reports that capture your interest payments. Do the math to calculate what your borrowing costs are to carry the amount you are loaning to your customers.

Two companies I worked with, for example, were able to take steps to recapture $150,000 and $900,000 per year respectively by being more aggressive with accounts receivable, more selective with credit limits and by monitoring and managing cash as a “business” within the business.

Stop the Losses

Stopping losses is often as important as finding improvements – especially in a worsening business climate such. Your sales and credit departments are going to come into conflict over this matter so it is going to take strong management leadership to make the right decisions.

Stopping losses is often as important as finding improvements – especially in a worsening business climate such. Your sales and credit departments are going to come into conflict over this matter so it is going to take strong management leadership to make the right decisions. The names have been changed in the following story but the essence is true. A client told me:

“We’d been doing business with Samssco for about 15 years and they were an important customer to us. We held their hands and were patient with them over the years when they were late making payments off and on over the years. I’d call Sam, he’d tell me what was going on and we’d ship him more product and wait. He’d always pay us. We got a really large order from Samssco – almost twice the normal size but they were already late on the last payment. I called Sam but he wasn’t available. That worried me so I asked our shipping department not to ship. I called Sam again and had to leave a message. Two weeks later I learned that Samssco had filed for bankruptcy. I was devastated. I thought Sam was a friend. We lost over $25,000 but if I had let the last shipment go it would have been over $75,000 and we would have been in trouble along with Sam.”

Revenue may be nice but sales that are written off are far more than lost revenue when they eat the profits from other sales! Make sure you understand the credit health of your customers at all times and don’t rely on sales people to make the credit judgments that you need a financial professional to make. You’ll save yourself a lot of tension and morale in the sales force and probably a lot of money in the long run. How large is your reserve for such losses? In what ways could you reduce it?

Here are six warning signs that may indicate credit trouble ahead before a meaningful change shows up in their credit rating – which you should be monitoring in any case.

Credit Warning Signs

1. Delays in payments. This is an obvious sign and your accounts receivable system should be set up to monitor and report on this on a continuous basis. Make sure you have a team of managers who are in the loop so they can see this and any of these other warning signs and take action quickly.

2. Changes in ordering patterns. The first sign may be a slowing in order volume. This is usually an indication that your customer is experiencing a slowdown in their business. The last sign may be a surprise order of a much larger size than usual. This could indicate that your customer is trying to stock up in advance of getting cut off.

3. Communication problems. You or your staff may have more trouble than usual getting through to your contacts at the company that owes you money. This is especially worrisome when the usual channels of communication for following up on open invoices suddenly slow down.

4. Pressuring the sales force. Your sales force might start getting pressured to make sales in spite of existing credit limits. This is the time to advise your sales team to keep their eyes and ears open for any signs of trouble at the customer or changes in the market.

5. The business sector is in trouble. Know which sectors your customers service directly and indirectly. Remember that that business slow-downs trickle down.

6. The grape vine is humming. Keep your ears open for those tidbits of information that are known to make their way through the industry. Ask all of your people who are in the field or talk to people in the industry to pass on information for the good of the company. Use any “casual” information legally and responsibly and only with appropriate verification.

Manage your credit risk deliberately

It is very costly to write off bad debt because you not only lose the profit on the original sales (if derived from sales) but you also have to make additional sales to cover the cost of sales just to break even.

Profit Improvement

Bad debt is a profit killer. A good profit improvement process invariably includes measures to reduce losses. Don’t give your profits away.

Seven Hidden Costs

Are you paying for these seven hidden costs? Do you want to save money? One recent study showed that about 30% of credit card holders pay $100 or more in hidden costs each year and 10% pay more than $500.

If you take the time to look over your personal credit card statements and regular bills it is quite likely that you will find one or more hidden costs. If you challenge your budget managers and accounts payable teams to do the same with your business bills, you will find even more.

Here are 7 common hidden costs and what to do to eliminate them:

  1. Fees for services you no longer need. Replace that rented modem with your own and get a 6-12 month cash payback.
  2. Renewal fees you never wanted. Many trial offers and “free” online deals come with very fine print commitments to renew automatically. If you had to give a credit card number for that “free” offer, assume that there will be a charge next month. Find them on your bills and cancel them.
  3. Hidden fees are common on phone, utility and other bills. Contact the vendor and challenge your bill.
  4. Phony bills are more common in business than in personal life. Cheaters count on our accounts payable personnel paying bills that look legitimate. Directory advertising is a common subject for phony invoices. Make sure everyone reads the fine print and that people who know what they are doing review the bills.
  5. Unwanted subscriptions. Publishers count on your automatic renewal and some send invoices years in advance of expiration. Check the expiration date before paying any invoices. Cancel those you do not want.
  6. Sneaky surcharges. You may have negotiated a fixed price but you must check the invoices to see if the provider has added a surcharge without informing you. Challenge unapproved surcharges and renegotiate or rebid as appropriate.
  7. Unused services. Phone companies and others such as software vendors who charge by the line or seat count on you not checking to see how many you actually need. Do an inventory and eliminate the excess. One client cut over $100,000 per year from their IT budget with this simple action.

Even scrupulous companies count on busy managers to miss these details and pay more. Now that you are alert you can save yourself and your business hundreds to tens of thousands of dollars every year.