E168 | Understanding Cash Flow and the Power of One with Alan Miltz
Do you understand cash flow? As in, do you really understand your cash flow, or are you just saying yes because you know you ought to?
Alan Miltz, co-founder of Cash Flow Story and co-author of Scaling Up has made it his life mission to help business owners not just understand cash flow, but to use it to avoid growing broke.
Alan’s idea, The Power of One, is that if you incrementally changed your business by 1% or 1 day changes, how long would it take you to achieve your desired financial results? The Power of One, says Alan, is the code of your company.
Why 1? Because everything Alan has developed one common theme – to make the complex simple. He wants business leaders and their teams to learn to love the numbers.
“Revenue is vanity, Profit is Sanity and Cash is king.”
Why might you listen to Alan? Because he’s the chartered accountant who co-wrote Vern Harnish’s book – Scaling Up Rockefeller Habits 2.0.
In today’s episode Alan explains why you need a cash flow ladder for your products or customers. You need to know what the working capital and cash implications are of each dollar of revenue to that customer cohort or for that product. He also discusses the levers that the leadership team should be able to pull to improve cash flow.
To find out more, check out the links to www.cashflowstory.com where Alan’s software resides.
On today’s podcast:
- Cash flow story
- The 7 levers
- Cash flow ladder
- The power of one
- Book – Scaling Up
- Twitter – @AlanMiltz
- LinkedIn – Alan Miltz
- Website – Alan Miltz, cashflowstory.com
Grow Your Business with the Story of Numbers with Alan Miltz
Alan Miltz is the co-founder of Cash Flow Story and co-author of Scaling Up, having written the financial component of the book. Alan’s dedicated his life to making numbers understandable in business.
He’s created and developed techniques over the last 25 years to help businesses better understand their cash flow. And he’s done this so successfully, his systems are used by hundreds of global banks and 1000s of companies in over 93 countries around the world.
“I take a set of financial statements and convert them into a story and I teach people how to implement improvement in their business. Everything I’ve done is about scaling up profit, cash and value.”
Cash flow story
Alan and his co-founders started Cash Flow Story to help business owners get to grips with numbers, simply.
“It was about realising people who were running companies were not trained accountants. But if we could converse and communicate to them in a way that they understood, it would be revolutionary.”
Alan starts every talk he gives with the same sentiment – Revenue is vanity. Profit is sanity. Cash is king. Yet everytime he talks to a CEO, they’re discussing revenue growth, margins, profit, and they think they understand their cash story, but they don’t.
“The quick way to calculate cash is the movement in all your bank accounts. So your cash at the bank, and your short and your long term debt.”
But cash flow isn’t the only chapter in the story of business numbers. A story of numbers is a four chapter story, says Alan. Profit is the first chapter. Working capital is chapter two, and it consists of three items – accounts receivable, invoicing, and accounts payable.
“A story of numbers is like reading a murder mystery. People are reading chapter one of their story and wondering why they don’t understand the result, or their cash. Imagine reading Chapter One of a murder mystery – you’ll never know who committed the crime when you don’t understand what the result is, or cash.”
The 7 levers
There are only 7 things the management team can control. They’re responsible for profit, for your working capital. There are seven levers they have – price, volume, margins, overhead – these are the four levers of profit. The other 3 levers of working capital are receivable days, inventory days (or in a service company, Work in Progress days) and payable days
The technique Alan created that’s now a part of the Scaling Up book, is the Power of One. The 7 levers above are the only things a management team can change.
“Sitting on the desk of everyone on your management team should be the Power of One every day of your life. Every decision you make, ask yourself, which of these levers can I change?”
So many companies, says Alan, say that if they reduce the stationery costs, it’ll help improve margins, but he says, this is like taking a beautiful white screen and painting a small black dot on it, and then focusing on the small black dot, while the rest of your business, the beautiful white screen with the 7 levers you can control, surrounds it.
The relationship with those levers is critical, says Alan.
“About 40% of companies I see, volume is detrimental to cash. So the more you grow, the worse your cash gets. And then you get sales people who don’t know this, and they give discounts to sell more.”
And you’re slowly growing broke.
But, continues Alan, never forget that price is a gift that keeps on giving. Price is alway the most sensitive item to your profit, your cash, your valuation.
Increase your prices and lose a bit of volume.
Cash flow ladder
Do you know where your company makes and loses money? Segment your business, and then rather than determine the gross margin for each segment, find out how much cash you absorb or product for the next dollar you sell, advises Alan. This is known as creating a cash flow ladder.
“You should be growing the business where you’re producing cash, and reengineering your business where you’re absorbing cash.”
And the thing is, growth sucks cash. So if you can, be deliberate about knowing which parts of your business growth suck in cash, allowing you to scale faster.
Everyone on your management team should be able to answer the question – what does success look like in my company? What should your margin be? What should your overheads be? As a percentage of revenue, how much profit should you make?
“For example, if I’m running a company I should know we should make 40% margin overheads, if run at 30 we make 10% profit. I also should know how quickly we should be collecting in days, how much inventory we hold, how we pay suppliers.”
Cash flow, says Alan, is the result of growth, and management needs to teach your company how to run in colour code green, and they need to use the power of one.
“Growth sucks cash, but management sucks cash if they’re not running your business properly. Every time you change the way you run the power of one, if it goes in the wrong direction, money is leaving your doors due to bad management.”
The solution? Collect slower ‘bad for cash’ and improve margins ‘good for cash’.
The power of one
“The power of one is what happens if you push up prices by 1%. What happens if you reduce costs by 1%? What happens if you change your AR AP by one day?”
Once you show people the power of one, says Alan, it changes the DNA of the management team. To workshop the power of one for your organisation, Alan suggests you write the seven levers down the side of a whiteboard. Your seven levers being: price, value, margins, overhead, and then you put your three working capital levers: receivable, inventory, payable.
You then call your management team to the room: marketing, operations, sales, finance, and you give every one of them little sticky notes. And then you workshop lever by lever. Ask yourselves – where can you get a price increase? Which products or services?
Once you’re finished workshopping, come back to the whiteboard and rank your ideas from most to least sensitive. Then choose the top four or five ideas.
You do this exercise every quarter and you’ll start to see change. It’s the repetition of these changes that gives you business momentum, financial performance like you’ve never dreamed of.
“Everyone in your company owns the numbers you need, anyone can understand the power of one. It’s just educating your team. Don’t be scared of the numbers. This is not about reporting. This is about improvement.”
Worried about getting push back from the CFO? Don’t, says Alan, simply say to them that this isn’t aimed at them. This isn’t the management team meddling in their daily activities. You need to teach your team to understand numbers in a non-accounting way.
“The power of one belongs to everyone. The CEO is responsible for implementing the power of one, not the CFO. It’s all about scaling up profit, cash and value. There are seven levers to do it. Everyone in the company owns the performance.”