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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

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Growth Affects Cash Flow

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5 Ways a CFO Adds Value

ways a CFO adds valueCheck out the following 5 ways a CFO adds value and how they can take their role to the next level – gaining more respect, increasing salary, etc.

Ways a CFO Adds Value

1.  The CFO Enables the Company to Grow Faster

CFO responsibilities include the following:

  • Formulating and implementing financial strategies
  • Managing the company’s financial departments
  • Ensuring that the company is in compliance with industry and legal standards

An effective CFO analyzes the company’s current financial position and market trends. Furthermore, this enhances financial strategies and improve cash flow and profits, while still keeping a lid on costs. This also enables the company to grow faster and more resourcefully.

2.  The CFO can Improve Company Profitability

Controlling costs, improving productivity, and analyzing and suggesting pricing strategies are three ways the CFO can impact the bottom line. Through oversight and management of the financial departments, the CFO has access to past and current financial reports. Access to this information gives the CFO ability to evaluate how the company can control costs in order to maximize profits. The CFO should also evaluate the productivity of employees in different departments. Then determine if there are any patterns of bottlenecks or slow-downs in operations. The financial reports will then enable the CFO to analyze net income from sales revenues and operational expenses. Then he or she can recommend optimal pricing strategies for the company’s products or services.

3.  The CFO can Improve Cash Flow

By managing the cash conversion cycle, the CFO can help the company improve collections, pricing, and terms resulting in increased liquidity. Cash flow projections prepared by the CFO provide a means for management of the lifeblood of the company – cash.

4.  The CFO has the Ability to Obtain Increased Leverage from Banks

Banks want to see in-house financial expertise. An effective CFO will enhance the financial know-how and of the company when working with banks. In smaller companies, the CEO usually handles bank relationships. In larger companies with different departments and extensive operations, a financial team led by a CFO is necessary to handle company finances and communicate with banks in financial language. An effective CFO knows that maintaining open lines of communication with their banker will enable the company to better access the funds needed for growth.

5.  The CFO Provides Leadership and Direction Throughout the Company

The CEO looks to the CFO to be a sounding board for new ideas, present and sell the financial picture to others and “peek around corners”. An effective CFO can also bring financial insight to sales and operations departments who often distance themselves from company finances or financial strategies. If both sales and operations work together with the CFO to maximize profits by increasing cash flow and minimizing costs, the entire company will become more successful.

If you want more tips on how to improve cash flow, then click here to access our 25 Ways to Improve Cash Flow whitepaper.

ways a CFO adds value
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What Business Issues Keep You Up?

As a business owner, I often find myself lying awake at night worrying about issues my company is facing.  Are we making as much money as we should be?  How is my cash flow?  Do I have the right team to grow the business?  These are just a few of the questions that cause me to lose sleep.

What Business Issues Keep You Up?

My guess is that I’m not alone in my insomnia, and I was curious to know what issues are keeping others up at night.  I put together a brief survey of some common business issues and solicited responses from my clients, colleagues, referral partners and members of our LinkedIn group.  I asked them to rate these issues on a scale of 0 (sleeping like a baby) to 5 (Ambien please!).  Here are the results so far:

 

up at night survey graph

 

Based upon these results, it appears that cash flow issues are currently demanding most of your attention.  Not surprisingly, managing growth comes in a close second as rapid growth is often the chief cause of cash flow problems.  I’m curious to see if turnover will become more of an issue as the economy continues to stabilize and employees begin to seek new opportunities.

What financial issues do you think are the most pressing for your company?  We’d love to have your input, so click here if you haven’t had a chance to submit your answers yet.  Stay tuned for updated results…

To learn more financial leadership skills download the free 7 Habits of Highly Effective CFOs.

business issues

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What The CEO Wants You to Know

Book: What the CEO Wants You to Know

In This Book You Will Learn

• Learn how your company really works
• Developing business acumen
• Tackling complexity
• Viewing business like an investor would
• How to execute successfully

Why this book is on our list?

From notable CEOs to street vendors – they all share a common secret to success by developing business acumen and learning to apply these fundamentals to all types and sizes of business. What the CEO Wants You to Know How Your Company Really Works recognizes that every business is the same inside. More specifically, all CEOs focus on cash generation, return on assets, growth, and customers. Learning how to block and tackle with these tools and stay out of the weeds comes with experience. Good CEOs cut through the complexities and bring clarity and simplicity. They look at businesses like investors would – investigating inconsistent PE multiples by revisiting the fundamentals. And most importantly, CEOs know how to execute.

Therefore, if you want to truly understand what the CEO wants you to know, the first key to getting things done is putting the right people in the right jobs, not shying away from conflict, and knowing when to make step changes along the way. Coaching is also a key success factor to execution – both from a business and behavior perspective. Synchronization and integration of efforts along with building effective social operating systems are also keys to successful execution.

Understand These Concepts

To learn how your company really works, you must understand the concepts of cash generation, return on asset, growth, and customers. Cash generation is the difference between all inflows and outflows of cash into the business in a given time period. In larger organizations this concept become more complex with the introduction of credit but in the end the complexities can be distilled back to this simple concept. Return on Assets (“ROA”), which is similar in concept to Return on Investments (“ROI”) and Return on Equity (“ROE”), “…tells you how much money is coming into your business from the use of your assets, from the investments the business has made, or from the investment shareholders have made in the company (equity).” The return is a function of margin and velocity – that is “the faster the velocity, the higher the return.”

What a CEO wants you to know is that growth is vital to prosperity. It should be profitable and sustainable. Many often measure growth by a concept called Shareholder Value Added (“SVA”). Effectively SVA measures whether the business through its management team is earning “…a return that is greater than the cost of using other people’s money.” However, to gain a true perspective of the quality of growth, you will need to drill down into the details of cash generation and return on assets. Focusing on business acumen is also how successful CEOs find opportunity for profitable growth when others cannot. The last concept focuses on knowing your customers. What the CEO wants you to know is that knowing your customers means knowing their preferences and what they are dissatisfied with. Direct contact with the customer often provides greater insight then solely relying on focus groups and other market research.

Author: Ram Charan

Ram Charan also spends time focusing on the people side of the equation. This includes putting the right people in the right jobs and dealing with mismatches. With regards to coaching, “…a true leader of people expands their capacity by helping them channel their skills, develop their abilities, and release their positive energy.” The focus should be both on the business side and personal behaviors. What the CEO Wants You to Know also dives into the subject of how to make groups more decisive by designing social operating mechanisms to synchronize efforts and link them to business priorities.

For example, “in a small organization, everyone knows everything that is going on….but as an organization grows and you have dozens, if not hundreds, of people working together, synchronization becomes a greater challenge.” Structures are created to encourage social interaction increasing complexity. The challenge in larger organizations is simplifying communications and unify efforts and priorities. Order Now.

To learn more financial leadership skills, download the free 7 Habits of Highly Effective CFOs.

what the ceo wants you to know

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