Tag Archives | cash flow

Problems When Experiencing Business Growth

Problems When Experiencing Business GrowthGrowth is great for companies, right? Not always. There are so many problems when experiencing business growth that can occur if the leadership is not careful. Besides the uncertainty of how long this growth period will last and how big the company will grow, companies loose focus on some basic key factors. This can include not managing working capital, hiring the right employees, not scaling effectively, customer service, and having less efficient operations.

What Happens To Growing Companies

What happens to growing companies? It all revolves around sales. The sales team and CEO are so excited about all the additional new sales and customers. Unfortunately, some of the day-to-day items fall through the cracks. This includes cash management, internal processes, management/leadership, and systems. But growth can be managed if financial leadership is looking far enough ahead and close enough in. Growing companies don’t always land into sticky situations, but there are some issues that need to be addressed.

Problems When Experiencing Business Growth

Cash Poor

Cash is king. Growth usually comes at the price of consuming cash… Buying more inventory to meet the sales, hiring more people and increasing SG&A. I say that in almost every single blog I post because I cannot emphasize it enough. The #1 thing business growth does is make companies cash poor. The management and forecasting of working capital is critical in a high growth situation. Before you know it, vendors are collecting their accounts receivable yet you have not collected your A/RInventory is consuming cash in order to meet sales. It’s a recipe for disaster!

Need help managing your cash? Inside our SCFO Lab contains 13-Week Cash Flow Reports, Dynamic Cash Flow Projections, Cash Flow Tune-Up Tool, Daily Cash Report, and the A/R Optimizer. Click here to learn how you can access all of that and so much more.

Inefficiencies in Operations

Another thing that happens to growing companies is the increase of inefficiencies in operations. The goal is to push out as much product as possible, but oftentimes to do that, corners get cut. Product quality decreases. And customers are not happy. It also may be the inconsistency between products and/or services as there are no standard operating procedures (SOPs) written down.  If you customers get hurt by a decline in quality or service, then you may have some permanent damage. In addition, companies may have an influx of new employees that are not being trained effectively and/or at all.

Management Mistakes

While management mistakes covers a variety of potential issues, let’s look at two. One of the biggest mistakes is not taking care of the employees. Management is scrambling to scale-up to push product out the door and to continue bringing in the sales. But when stress is high and people aren’t being taken care of, you risk increasing employee turnover. This also includes knowing when to bring on new talent. If management is not continually recruiting and looking for new talent to help even the load off of current employees, then you risk further increasing employee turnover. Remember, the cost of employee turnover is on average $65,000 in the U.S.A. according to some studies.

The second biggest mistake is letting inefficiencies run high. At some point, there has to be a stop to letting inefficiencies continue. Financial leadership should be working with other departments to find better solutions that will deliver the same results. Your basic dashboards are very critical in a high growth situation.

If there are no other solutions, then you need to focus on the customers you have now versus continuing to grow.

Not Scaling

Another problem that occurs during a high growth period includes not scaling up. Are you getting the systems you need to run your business effectively? For example, a company is using a customer relationship management (CRM) system like Zoho or Bitrix – designed for small companies. However, this company triples overnight. They have outgrown their current CRM system. Instead of choosing a system that was for where they were at, they should have forecasted where they thought they were going and on-boarded a system that was maybe a little bigger for them to grow into.

Problems When Experiencing Business Growth

Some of the problems when experiencing business growth include the following:

The best way to address problems when experiencing business growth is to first look internally. Access our Internal Analysis whitepaper to analyze your company’s strengths and weaknesses.

Case Study

Let’s look at a case study about a company I worked with recently. They are manufacturer of industrial parts and had experienced growth for $20 million in revenue to nearly $100 mm in revenue in just three years. The company had a basic accounting staff but no financial professional on staff. Why? Because according to the owners, they are too expensive. The company quickly outgrew their accounting system. In addition, they purchased raw materials aggressively. The sales guys were living the dream with non-stop sales orders. They literally could not keep up with all the new sales orders. The manufacturing facility was now on three shifts to cover all orders. The company also did not want to spend the money on a second plant supervisor.

What were the results? It created a high stress environment. Cash became very tight and sales were being generated, but the order to cash cycle increased to almost 100 days. In addition, the quality of the products suffered because there was not proper supervision for the second and third shift. The accounting records were also not correct and reliable. Instead of the records being generated for large accruals and proper costing of products, they were generated by a basic accounting staff who were no equipped. Furthermore, margins were not reliable for management to use. Cash got tight quickly. The line of credit was maximized very quickly. When the lender challenged the compliance certificates and the financial statements, the ownership started to get concerned about the “back office”.

This financial distress and stressed out employees/ownership could have all been avoided with proper planning and forecasting.

Navigating Business Growth

When navigating business growth, it is important to know both your strengths and weaknesses. Ignorance to those two things risk inviting for unoptimized strengths and weaknesses that turn into major threats. Access our free Internal Analysis whitepaper to assist your leadership decisions and create the roadmap for your company’s success.

Problems When Experiencing Business Growth, Navigating Business Growth

Problems When Experiencing Business Growth, Navigating Business Growth

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Free Cash Flow Definition

See also:
Discounted Cash Flow Analysis
Valuation Methods
Free Cash Flow Analysis

Free Cash Flow Definition

The business is like a human body, the body needs blood, the business needs cash. Investor look at Free Cash Flow to make their decision for investment. Interestingly, it’s not a number you can come up easily. First, let’s look at the free cash flow definition. Many business owners, somehow, are not familiar with Free Cash Flow. The Free Cash Flow definition is cash generated by the company after deducting capital expenditures from its operating cash flow the amount of. In other words, after the company pays for employees, debts, expense, fixed assets, rent, plant, etc., whatever money you have got left (“left-over money“) is called Free Cash Flow.

FCF Example

For example, a company has $1 million cash flow from operating activities in its financial statement. However, they are spending more than $900,000 on purchasing property plants or replacing equipment. In this case, the investor will have to analyze the business to see if it was either a poor management decision or a high growth opportunity (i.e. more investment than cash on hand).

Even when a company makes positive Net Earnings, it doesn’t necessarily mean that company has Free Cash Flow.


If you want to improve your company’s cash flow, we have put together the 25 Ways To Improve Cash Flow (which you can access for free).

Click here to Download the 25 Ways to Improve Cash Flow


Why is Free Cash Flow Important?

As it mentioned above, cash keeps the business running. If your company has Free Cash Flow, then what should the company be spending the money on? They could either hire more employees, invest in other assets, issue dividends, or make more acquisition. Before you make the decision, there are 3 main reasons you would consider FCF as a competitive advantage to maintain the business growth rate.

Free Cash Flow to Equity (FCFE)

FCFE measures the Equity value, referred as “levered” cash flow. It’s the amount of money available for equity shareholders after paying all expenses, debts, reinvestment. Also, consider free cash flow to equity as an adjustment for debt cash flow.

Free Cash Flow to Firm (FCFF)

FCFF measures the enterprise value, referred to as “unlevered” cash flow. Free cash flow to firm shows available cash to all investor – both debt and equity. In an Unlevered Discounted Cash Flow analysis, you would use WACC (Weighted Average Cost of Capital).

Valuation using Free Cash Flow

Other than using DCF method (Discounted Cash Flow), use Free Cash Flow to estimate the present value of a business.

FCF = Present Value.

By calculating free cash flow, you can interpret discretionary cash flow of the company. If FCF is positive, then the company has many options where to put the money in. Whereas if FCF is negative, then you have to analyze if it’s a one-time issue or a recurring problem. If it’s constantly negative, then the company has to raise more money (debt or equity) or eventually has to restructure itself.

Free Cash Flow Formula

The free cash flow formula is very simple. Look at the Cash Flow Statement. Subtract Capital Expenditures from Operating Cash Flow.

Free Cash Flow = Cash Flow from Operation – Capital Expenditures

Operating Cash Flow

Operating cash flow is the amount of money required to fund a company’s normal operation. It’s usually in bold and always show before Financing and Investing Cash Flow. You can also refer to Operating Cash Flow as “Working Capital“.

 Capital Expenditures (CAPEX)

Find Capital Expenditures (CAPEX) in the Cash Flow Statement, under Cash Flow from Investing Activities. However, Capital Expenditures is sometimes listed as Purchase of Property & Equipment. Capital Expenditure is different from Operating Expense (OpEx).

If you want to increase cash flow, then click here to access our 25 Ways to Improve Cash Flow whitepaper.

free cash flow definition, Free Cash Flow Formula
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Why Use a 13-Week Cash Flow Report as a Management Tool?

Why use a 13-Week Cash Flow Report as a management tool? Cash is king! This applies to any and all companies. No matter the size or industry, cash and cash flow are critical to any operation. Yes, some companies have access to lines of credit and other forms of financing, but that is debt that must be repaid at some point.

So if cash is so important, then why do not all companies use a rolling 13-week cash flow forecast?  We have had many clients over the years. And some, but not all, use a 13-week cash flow report as a management tool that is updated every week. Once the process is started, it is actually a fairly easy tool to keep updated.

Cash is critical to a company’s success. Click here to access our 25 Ways to Improve Cash Flow whitepaper and start improving cash flow today.

Establish a 13-Week Cash Flow Report

The first thing we do with every client is to make sure they establish a 13-week cash flow forecast if they do not already have one. And usually, the first thing we are told by someone at the client office is “our business is special, forecasting when we collect cash is almost impossible to predict”. I hear this way to often and you know, we have never failed at implementing a 13 week cash flow forecast.

13-Week Cash Flow Report as a Management ToolThe Purpose of the 13-Week Cash Flow Report as a Management Tool

The 13-week cash flow report is not meant to me an exact measure of what cash balance will be at the end of every week. On the contrary, it is a forecast. That means the actual results will be different from your forecast, especially in the later weeks. But what the cash flow forecast does tell you is your trend for ending cash balances. It actually does give you an estimate of what your cash balances will be. It is true that weeks 1,2 and 3 forecast are more accurate than weeks 11, 12 and 13.  But it does not take away that it provides some visibility as to where cash will end up.

The 13-week cash flow forecast is useful to a company that is financial distress and to a company that is flush with cash. That is because a company that is in financial distress must be able to determine what costs they need to cut in order to achieve a cash neutral position. A company that is cash rich, needs to know how flush they will be with cash to project things like capital expenditures or shareholder distributions. Either way, the company must have an idea of where they will be over the next 13 weeks. Why 13 weeks? Because that captures an entire 3 months, one full quarter. Being able to have an idea of where you want from a cash position in the next 3 months allows time for planning and decision making.

Do you need help putting together your 13-week cash flow report? Access our template and how to use it (and so much more) in our SCFO Lab. Learn more about the SCFO Lab here.

Cash Collections

It is interesting how many times we have implemented a 13 week cash flow forecast, then we look into why the cash actually collected is way off in weeks 1,2 and 3. Then we dig and find out that the actual cash collection process is poor or non-existent.

Case Study

I was part of a Chapter 11 bankruptcy process a couple years ago. The first thing we did was implement a 13 week cash flow forecast. This is something any CRO would do. When asked about cash collections, the CEO told me that the sales team (7 people) handle collections with their respective client relationships. When we were way off on week 1 and 2, I asked the sales people why we are off?  What are they doing to follow up on late accounts receivable (A/R)?  The response from everyone on the sales team was that they do not handle calling to collect invoices and outstanding A/R.  They stated that the accountant makes those calls and follows up with old A/R.  When I asked the accountant, she said the sales guys collect old A/R.

No one was following up with collections of old A/R. I initiated a daily phone call with all the sales people and assigned clients to call on and follow up on old A/R. We started with daily calls. And we saw some progress, then we went to every other day, then weekly calls. Over then next 5 weeks the company collected $2.7 of $3.2 million dollars in old AR.

So How Do You Start Using a 13-Week Cash Flow Report?

Week 1,2,3….13

Create a template that has a direct method cash flow statement.

Cash In –         Cash from accounts receivable

Then list cash from work not invoiced yet (this would be in the outer weeks)

Cash Out–       Major lines of operating expenses

Payroll

Other

On a weekly basis, pull A/R and A/P from your accounting system. Then link the individual items to the line items in the cash flow forecast. Don’t forget payroll totals.

Include a section below operations for CAPEX activities and another section for Financing Activities.

End cash balance by week

Cumulative cash balances by week

Have one person in your accounting department responsible for updating the 13-week cash flow forecast weekly. Make sure you have a dedicated person/people follow up on collections.  Compare the forecast for each week to the actual cash collections and cash payments – note variances. Then adjust how you forecast.

It is that simple! This tool will buy you peace of mind and allow you to have insight on your cash trends. You need to know this no matter the size of your company or your industry. Do not get frustrated; your first 3-4 weeks are a learning process. Your forecast WILL be off. Make adjustments and understand your variances. Before you know it, you will have a good feel for what your cash trends are. If you are strapped for cash now, click here to access our 25 Ways to Improve Cash Flow whitepaper. Make a big impact on your company today with this simple checklist.

13-Week Cash Flow Report as a Management Tool
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What is Cash Flow?

See also:
Free Cash Flow Definition
How Growth Affects Cash Flow
Why Use a 13-Week Cash Flow Report as a Management Tool?
Why You Need to Have a 13-Week Cash Flow Report

What is Cash Flow?

Cash flow is a term describing the money into and out of a business. This includes all transactions that transfer cash. Furthermore, the business’s sources of cash are separated into three areas in the company’s cash flow statements. Some of the different categories for money spent or earned to fit into the following:

Cash flow in vital to your business. It is the blood or oxygen for your company. Without it, there is no company.

What is Net Income?

Net income is a measure of revenue after subtracting all expenses. This means you take the total revenue for a period and subtract cost of goods/services as well as overhead. This gives a rough idea of whether a business made ‘money’ during the period. However, net income is not a good way to determine the cash usage in a business.

Key Differences Between Cash Flow & Net Income

Some of the key differences between cash flow and net income include the following:

  1. A business can be profitable and go out of business from lack of cash.
  2. A business can have cash flow but remain unprofitable.
  3. Cash flow is reflected on the cash flow statement and not the income statement or balance sheet.
  4. Analyzing cash flow is a way of planning for future cash needs.
  5. Investors can tell where the cash comes from and where it goes from statement of cash flows.
  6. Loans show up as cash on an income statement; Loans are shown as positive financing activities in the statement of cash flows.
  7. Watching cash flow helps notify a business of cash shortages and shows when to borrow money to keep operations going.

Click here to read more about Cash Flow vs Net Income.

What is Cash Flow?

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Access your Cash Flow Tuneup Execution Plan in SCFO Lab. This tool enables you to quantify the cash unlocked in your company.

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What is Cash Flow?

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Spot a Zombie Company

Last week, I talked with several lenders, investors, and entrepreneurs. One of the topics that kept coming up was their client’s problems wasn’t cash – even though their clients tried to convince them of it. While cash was an issue that needed to be addressed, the problem instead lies in the leadership. A few weeks ago, we discussed how zombie employees are destroying your company. But those zombie employees have developed a zombie culture! Here’s how to spot a zombie company and identify if you are one of them.

spot a zombie companyHow to Spot a Zombie Company

In any type of therapy group, the first step to recovery is admitting that you have a problem. Identification is crucial if you want to change. Therefore, we are walking through how to spot a zombie company. As it is so prevalent in our business society, it’s becoming more and more difficult to disguise.

Stay ahead of the curve and download our 3 Most Powerful Tools for free! Don’t sit back and watch your company spiral into a zombie company

#1 Status… And You Know It

Have you ever seen a company that boast it’s #1 and everyone around knows it? These companies get to the top, become prideful, and then eventually, they are overrun by zombie employees. If every single person in your company says the exact same thing, then you’re in big trouble. In order to be successful, you need people to go against the grain. That’s how innovation happens.

Enron, for example, was Fortune Magazine’s “America’s Most Innovative Company.” But nearing the collapse of their empire, innovation came to a halt as the executives became more greedy and created a culture of secrecy. They knew they were #1. So, the executives challenged anyone trying to innovate or make changes to the company. Both employers and employees lost sight of the mission and vision of their company. As a result, both parties caused (or would have caused) the death of the company.

“Do you know what it takes to make an ethical decision in the face of a group of people who are willing to go the other direction? It’s one of the most single vulnerable acts of our lives.” – Brené Brown

spot a zombie company

Happy Go Lucky

Happy go lucky is a term that means that people are cheerfully willing to have no concern for the future. Many can easily identify the difference between authentic happiness and fabricated happiness. The later wreaks of inauthenticity and feels gross. When a company culture is always happy, it may be an indicator that it’s a zombie company. In this case, you may find that both employees and employers are:

  • Ignorant of anything bad going on
  • Blindly doing their jobs
  • Hiding something from others
  • Shutting down any negative statement or critique
  • Saying positive things all the time

There’s a huge difference between a company that everyone loves working for and a company where everyone is happy. You cannot expect your employees to be happy every single day. Life happens. So if it seems like life isn’t happening at a company, then it could mean bad news.

They Don’t Change

Zombie companies simply don’t change or allow for change to happen. Because they are so laser-focused on their vision and mission, they neglect the changing world around them. Technology is changed every single day. What worked a month ago may not work today. Remember Borders? It was a popular bookstore. But while Barnes & Noble and Amazon were taking advantage of new technology (Nook, Kindle, etc.) and building an e-commerce platform, Borders did not at first. By the time they did start to change, it was already too late. While there were many other financial issues that needed to be addressed in Borders for it to survive, the key is that zombie companies don’t want to change.

Look around in your community. It’s relatively easy to spot a zombie company as the demand for change is becoming increasingly prevalent. Many leaders get overwhelmed by change, so they simply stop changing. But they are also killing their company. As the financial leader of your company, you must be willing to allow change and create change in your company.

spot a zombie company

They Know Everything

Zombie companies are comprised of “know-it-alls.” Whether it be the employers or the employees, they think they have everything under control, know everything, and don’t want to learn. What do your customers want? If the response is “we know everything already”, start running. Truth is… You don’t know your customers. They are changing every single day. Like I said before, technology is changing constantly. As a result, your customers are too. Businesses aren’t in business without your customers. So you need to be talking with your customers daily.

A couple years ago, news spread eventually but it took time to spread. Now, news spreads like wildfire and at times, it can be very overwhelming. Platforms like Facebook, Twitter, online news sources (NY Times, Wall Street Journal, etc.) force feed you content every second of the day. While you may know a lot of things, you don’t know everything. But zombie company’s think they know everything. And that’s a problem.

Challenge each of your team members to question everything you do and why you do it. Call up your customers. Learn how to improve productivity or improve cash flow. Innovate you finance, operations, and sales departments.

Is Your Company a Zombie Company?

The biggest question of the hour… Is your company a zombie company? Have we described you in the above paragraphs? We have good news… You have identified that you have a problem. And there’s a solution to reverse the effects of being overwhelmed by zombies.

Be a Financial Leader

The best way is to be an effective financial leader. At The Strategic CFO, we pride ourselves in developing financial leadership in our clients as we consult with them and coach them. Like we said before, some companies think they have a cash problem or inventory problem or economic problem… But in reality, it starts with the leadership. A fish rots from the head down, so therefore, you as the financial leader need to be a more effective leader, improve profitability, and improve cash flow.

Improve Profitability

You have set your prices, have your costs, and out comes profit. But to not slip back into old habits, you need to think of profitability improvement strategies. Click here to access one of our 3 Best Tools includes our Pricing for Profit Inspection Guide. Improve profitability by shaping your prices (and economics) to result in profits.

Improve Cash Flow

We say it frequently because it’s true… Cash is king. As a leader, you need to have your finger on cash at all times. The worst thing (and unfortunately, a common issue) is that the executive team expects cash to be there because they made their sales mark. But if someone is not watching it, it could end badly. Click here to download our 25 Ways to Improve Cash Flow whitepaper, along with our other 2 most powerful tools, to learn about cash flow improvement strategies.

Be a More Effective Leader

Zombie companies lack effective leadership. You can create success through financial leadership. That’s what we as a company lives and breathes everyday. Be a more effective leader and access our 3 best tools to start growing your company.

spot a zombie company

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Access your Strategic Pricing Model Execution Plan in SCFO Lab. The step-by-step plan to set your prices to maximize profits.

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How Growth Affects Cash Flow

Growth is great! Whether it is expanding into your third country or tapping into a new market, it’s an exhilarating process (especially for the entrepreneur). But it can also result in a crisis… You can’t fulfill orders; processes are being thrown out the door to just get it done; inventory isn’t leaving the warehouse. Growth can result in a disaster. When a company is growing at any speed, there are often growing pains that come with it. Over the past 20+ years, The Strategic CFO has witnessed and been a part of some incredible turnarounds that started from a few simple steps of improvement. The #1 growing pain stems from cash. Or, actually the lack of it.  We often forget how growth affects cash flow, but it has huge repercussions if you are not watching it carefully.

Growth Affects Cash Flow

What Happens When a Company Grows

When a company grows, the first visible thing that happens is cash gets tight. It’s very common for your marketing and sales team to see grow as only a good thing; nothing bad could be caused from growth. But when more sales come in, more employees are needed, more offices are required, more inventory is purchased, money can very quickly fly out the door. We say it frequently because it’s true: cash is king.

As you gear up for growth or are in the early stages of growth, also iron out some of the issues that may grow into problems as the company grows. For obvious reasons, start addressing any issues that impact the cash flow of the company. Then address other issues including management, accounting, product development, and labor.

Another thing that normally happens is that we are so excited about growth, and maybe cash is controlled, but we forget about controls, specifically internal controls.  Money is flowing and product is flying off the shelf, but no one is watching what may be lose ends.  Such as in a manufacturing scenario, material is being ordered as fast as you can get it and raw materials are being converted to finished goods. But maybe waste is also going through the roof because no one is watching that.  Or maybe tools are mysteriously disappearing from the shop, or maybe your margins are actually suffering because your indirect costs have grown more than anticipated.  The lack of having process and controls in place can lead to the mentioned issues, thus also leading to squeezing cash.  Because ultimately, it all results in cash or consumption of cash.

Growth Affects Cash Flow

Growing Too Quickly?

If you are in a company that is growing too quickly, it may be time to get some capital. There are several types of capital that you can acquire to fund your rapid growth. Ultimately, there are three ways to get capital.

  1. Debt
  2. Equity
  3. Or a mixture/combination of debt or equity, or debt that can convert to equity

Giving up equity is the most costly way to raise capital because as your grow you have given up some of the upside. The sources of either debt or equity include and are not limited to the following:

At The Strategic CFO we can help you analyze the different cost of this capital and the most efficient structure for your business.

Start-ups, development of new products, etc. often require a good amount of working capital to support the rapid growth for those products or services to have a steady foothold in the marketplace. Consequently, they require a significant amount of cash and leadership for it to be catapulted into success. If this is you, start the cash flow improvement strategies early. Make it part of your culture and processes. The key is to manage your cash effectively so that each dollar can be stretched to the max. Download our free 25 Ways to Improve Cash Flow guide to start implementing tested and successful cash flow improvement strategies into your company.

Growth Affects Cash Flow by Absorbing Cash

If you haven’t figured out by now, growth has a way of absorbing cash. When a company wants to increase sales, it requires fuel – cash. As the financial leader of your company, shift your focus on improving profitability and providing fuel for your sales team to grow the company. While your CEO needs to grow the company, he or she needs a wingman to lean on. You are that wingman. Instead of acting as a CFnO (say it like CF No), provide a path for your CEO to grow the company. Guide them in your new cash flow improvement strategies.

Don’t know where to start in improving your cash flow? Click here to download our 25 Ways to Improve Cash flow and get an invitation to our SCFO Lab – the premier financial leadership coaching platform.

Growth Affects Cash Flow

Cash Conversion Cycle (CCC)

As you continue to look how growth affects cash flow, start by analyzing your cash conversion cycle. Simply, it is the amount of time that you are able to convert processes, resources, etc. back into cash. There are some simple steps to reduce your Cash Conversion Cycle (CCC) or operating cycle, but let’s see what it is and how you can use that to improve your cash flow.

What is the Cash Conversion Cycle?

The Cash Conversion Cycle (CCC) calculates the amount of time it takes to convert resources into cash flow. To calculate your CCC, use the following equation:

CCC = DIO + DSO – DPO

DIO stands for Days Inventory Outstanding. DSO stands for Days Sales Outstanding. And finally, DPO stands for Days Payable Outstanding. By using the CCC, you will be able to identify areas of improvement.

For example, if you are collecting receivables every 45 days, you may have an opportunity to reduce that to 30 days. By collecting receivables 15 days earlier, you will not be in as large of a cash crunch because that cash is in the bank 30 days after the service is rendered versus 45 days. To calculate DSO, use the following formula:

DSO = 365 * (Average Accounts Receivable / Total Credit Sales

How to Improve Your Cash Flow

There are several ways to improve your cash flow using the Cash Conversion Cycle. Some of these include improving collections (A/R), invoicing quicker, obtaining deposits faster, extending vendors so that you can pay later, and reduce the amount of inventory stored. For example, a few of our clients are in the oil & gas industry. When the oil & gas industry takes a downward turn, we are impacted because they cannot pay us as quickly, but they need us more than ever. One of the tactics we put into practice to improve our cash flow was to invoice within 24 hours. Our clients were being trained to respond to us quicker and pay our invoices. Therefore, we were then able to do more to help them.

There are so many other ways to improve your cash flow, especially in times of growth when cash is tightest. If you are seeking more ways to make a big impact in your company, download the free 25 Ways To Improve Cash Flow whitepaper to find other ways to improve your cash flow within 24 hours.

Growth Affects Cash Flow

Strategic CFO Lab Member Extra

Access your Cash Flow Tuneup Execution Plan in SCFO Lab. This tool enables you to quantify the cash unlocked in your company.

Click here to access your Execution Plan. Not a Lab Member?

Click here to learn more about SCFO Labs

Growth Affects Cash Flow

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5 Cs of Credit – How to Be More Credit Worthy

Are you credit worthy? Right now, is your credit good enough for a lender to give you a loan or line of credit today? If your answer is no or if your not sure of your answer, take a look at the 5 Cs of Credit. This 5-point checklist allows loan officers to easily determine if you are going to be good for their banking business. Although, banks don’t strictly rely on only the 5 Cs of Credit, it’s good to know where they start.

But first, what are the 5 Cs of Credit?

5 Cs of Credit

The 5 Cs of Credit include cash flow, collateral, capital, character, and conditions.

5 cs of creditCash Flow

The bank need to know that your company can generate (and has generated) enough cash flow to pay off the debt. To increase your chances of getting approved for a loan, display how you have paid off debt before, had consistent cash flow, and plan to pay off debt in the future. Remember, cash is king. Because of that, this is one of the most important Cs.

If you need to improve your cash flow, download our free 25 Ways to Improve Cash flow whitepaper. Get approved for that loan!

Collateral

Unfortunately, some companies fail. Regardless of whether the company fails or not, the bank wants to make sure that it can be paid. The bank looks for sufficient collateral to cover the amount of the loan as the secondary source of repayment. This C allows the bank to cover all their bases because at the end of the day, they just want to be paid.

The bank wants to make sure it is protected if you cannot repay the loan. As a result, the bank will look into your savings, investments, and/or property.

5 cs of credit

Capital

Capital is a huge sign of commitment. One of the reasons why the bank looks at capital to approve a loan is to confirm that the company can weather any storm and ensure that the owner will not just walk out any day. The bank needs to know that there is a significant commitment, that being an investment, from the owners of the company.

Character

One of the suggestions we give to clients when developing a banking relationship is to take their banker out to lunch. This provides an opportunity for the banker to assess your character. What are they looking for? Integrity, honesty, respect, and other virtues reflect a good business person who will stick with their commitments in the good times and the bad. Sound character is critical in business. The banks want to feel safe when doing business with you.

Indicators of character include credit history and stability. The biggest question asked is, “will you be able to repay the debt?”

Conditions

With any business, there are external factors that could impact the company’s success. Therefore, the bank looks for conditions surrounding your business that may or may not pose a significant risk to your ability to succeed (and pay off your loan). If there is high risk, the banks will be more cautious when approaching you. But if the risks are small and do not impact any of the 5 Cs of Credit, then the bank is more willing to offer a loan.

Ask yourself: can you repay the debt?

Why do banks follow the 5 Cs of Credit?

In short, banks follow the 5 Cs of Credit to mitigate any risk related to loaning to a company. The risk a bank incurs from lending money to companies can be managed by assessing different areas of credit. Although not every bank uses this list, it’s safe to assume that when approaching a bank, you need to address each of these factors.

Relationships

Business deals with people; therefore, it is critical for the management (especially the owner/CEO/CFO) to have a good relationship with their banker. Imagine a random person coming into your office to ask for a $350,000 loan. Because you have no relationship with them, you don’t know how honest they are, if they have integrity, how willing they are to pay back the loan, how they do business, etc. Because there are a lot of unknowns, the risk increases dramatically.

Trust between a bank and a company is developed when you have proven that you are able to pay off your loans, have long-lasting relationships with customers, vendors, suppliers, etc., and alert the bank if your projections are a little off.

5 cs of creditWhat Lenders Look For

Lenders look to reduce their risk. They are willing to provide loans that may not have the highest return over risky loans with high returns. Areas of risk include the amount of credit used, the number of recent applications for loans, how much the company makes, and available collateral.

To start the process of applying for a loan, address areas that need to be fixed before the application, explain any red flags that your banker might raise, and prove you are credit worthy.

How to be More Credit Worthy

Creditworthiness is a valuation method banks use to measure their customers, your company. Although there may be slight differences between personal and business credit scores, it is a good start to improve your personal credit score. If you follow the same guidelines in your business, the company’s creditworthiness will increase.

Be more credit worthy by:

  • Paying bills on time
  • Pay more than just the minimum amount required
  • Manage credit card balances
  • Limit or manage the usage of debt

In addition to addressing the factors that directly impact your credit score, take a look at the 5 Cs of Credit. If you find yourself lacking in any one of those areas, make it a goal to increase your creditworthiness in that area over the next quarter. If you have decided to start tackling the first “C” – cash flow – download the free 25 Ways to Improve Cash Flow whitepaper. Make a big impact today with this checklist.

How to Be More Credit Worthy, 5 cs of credit

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How to Be More Credit Worthy, 5 cs of credit

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