Strong Sales Does Not Mean Strong Cash Flow

Strong Sales Does Not Mean Strong Cash Flow

When I was a young MBA student, one of my professors had a saying that has stuck with me ever since. “You can live without sales, you cannot live without cash flow” he used to say. This saying has been proven again and again to me in the course of my career as executive and as a commercial banker. Most of my commercial customers who sought lines of credit were doing so to cover cash flow issues they were having. Some were experiencing rapid growth and needed the short term borrowing to purchase inventory or finance work ahead of payment. From time to time however, I found myself in front of a customer that had severe cash flow issues that were not associated with rapid growth. Finding the Cash Flow Problem One particular case was intriguing for a number of reasons that highlight both the need for short term borrowing for cash flow issues, and how that very borrowing can delay the company in confronting the underlying cause of the cash flow issue at hand. In this particular case, the company was experiencing very slow payment on its accounts receivable. Normally in such a case, the bank calculates an average collection ratio. This is calculated on an annual basis by taking the accounts receivable divided by (total sales/365). The shorter the number of days, the more quickly the company is collecting payment on its A/R. And of course the quicker the collection the better the cash flow. For this particular company, the average collection was over 90 days. Some accounts were in excess of 365 days. To compound the issue,...
Smarts + Experience + Listening = Greatness. The Magic Formula.

Smarts + Experience + Listening = Greatness. The Magic Formula.

People often ask me how I was able to make my last business successful. What special skills and capabilities did I bring to the table? How was I able to make the Inc 500 list for several years and manage continued fast growth? Having a big ego definitely wasn’t the skill that made it happen. So what was? For corporate leadership, I was good at finding people far smarter and experienced than myself, and then I listened to what they had to say. Groupthink, and the opportunity to have others evaluate, give me feedback, and tweak my smartness and stupidity as I built strategy – and executed on it – was the only reason I was successful. Notice that there are three parts to the above statement. Three very important parts that need to be in sync for it all to work. I was very good at finding people far smarter and experienced than myself, and then I listened to what they had to say. Woo Hoo. Three Parts. So What? Each statement means nothing on its own. If you hire smart and experienced people but don’t listen to them, you’re greatly limiting your opportunity for success. If you hire people who “haven’t been there and done that”, or just don’t “get it”, and then take their advice, you could be headed for failure as easily as greatness. I’ve seen both happen on a regular basis. In addition, note that I said “smarter and experienced”. Intelligence without experience means they still have to go through the process of learning what works and what doesn’t. They have to have both succeeded and failed...
FWS Weekly Resource Roundup n.5 – Focus on Free Press

FWS Weekly Resource Roundup n.5 – Focus on Free Press

I wrote a blog entry recently – “Shout! Scream! Yell! Your Company Depends On It!” – that focuses on the need to make people aware of your existence if you want them to hear your message.  What better way is there for a small business to get their existence noticed than to gain free press. In today’s weekly roundup, we’re going to focus on tools and ways to find reporters and bloggers and how to make yourself known to them – all in the name of gaining free press for your small business. First, when you’re going after free press, let’s make sure you understand how to approach the reporters and maximize your opportunity to be included as a source.  Also, what are some ways – other than the services below – to get mentioned in the press? Proven Tips for Getting Free Publicity on HARO 25 Ways to Get Press for Your Business How Do You Work With Reporters? With A Little Common Sense and Methodology. 11 alternatives for a news release And how about a tool to help you come up with a great headline for news releases and blog articles?  Check out the Emotional Marketing Value Headline Analyzer.  Your headline will be analyzed and scored based on the total number of EMV words it has in relation to the total number of words it contains. Now, how about some tools that will help you get free press?  The reporters and bloggers on most of these sites do not focus on a single industry – or even just business.  They run the gamut from breaking news, to entertainment, to social,...
Turn Baby Turn – Why Inventory Turns Matter

Turn Baby Turn – Why Inventory Turns Matter

This is the third part of our series on ratios and what they mean to your business. Inventory turns are the amount of times in a fiscal year that you sell your complete inventory. The ratio is normally calculated by dividing sales by inventory on the year end balance sheet. As an example, if sales are $1,500,000 and inventory is 300,000 on the year end balance sheet, then: In this case the inventory turns five times per year. It can also be calculated by dividing cost of goods sold by average inventory. However, the sales/inventory is the more popular method. If you then divide the number of days in a year by the number of inventory turns, you get the inventory turnover period.  For example, using the 5 inventory turns from above, the inventory turnover period would be 73 days.   The reason this ratio is so important is that the more often the inventory turns the higher the profits. Profit is made each time inventory sells (or at least it better be!), so the quicker it sells the more profits you are bringing in.  A high turnover ratio implies that purchasing is managed well. Alternatively, it may mean that there is not enough cash to maintain normal inventory levels, and so the company is turning away possible sales. The second scenario is most likely when the amount of debt is unusually high and there are few cash reserves.   On the other hand, a low turnover ratio implies  implies that a business may have bought too many goods and their approach to purchasing is unsound. In this case, inventory aging may occur and the inventory may...
Shout! Scream! Yell! Your Company Depends On It!

Shout! Scream! Yell! Your Company Depends On It!

A friend said to me yesterday, “Your company has strong offerings, but they mean nothing unless people know you exist.” I proffer this same advice to my clients, but it really clicked personally when he repeated these words back to me. “What you offer will never be bought unless people know you exist.” I’ve Heard of Them Politicians don’t get elected because of the fact that they have a great message. They get elected because the public, first, finds out they exist. It’s only then that their message is truly heard and they find their support. The church doesn’t have an opportunity to communicate its beliefs until you know it is out there – and the churches with the strongest voices in your community are usually the ones with the largest membership. There are thousands of companies that make and sell software, but I challenge you to name more than a dozen of them off the top of your head. Why is this so difficult? Because very few have roared “We’re here.” So What’s Your Point? Marketing. Sales is one to one. Marketing is one to many, and creates a funnel for those one to one sales – and, more importantly, the opportunity for you to share your message. In small businesses, marketing – if it even exists in the first place – is an afterthought, usually has a minimal budget and is often one of the first areas to be cut when expenses need to be decreased. On the other hand, most small businesses give little thought to adding “the ultimate salesperson”. You know – the sales guy...
FWS Weekly Business Roundup n.4 – Focus on Strategic Planning

FWS Weekly Business Roundup n.4 – Focus on Strategic Planning

Rain, rain and more rain.  I wish it was nicer out, but at least it gave us some time to put together a decent list of resources and articles.  We’re going to focus on strategic planning this week.  It takes a long time to put together a fairly comprehensive strategic plan, so using the normally slow Summertime to start the strategic planning project is never a bad thing.   First – I just want to clarify something.  My clients often confuse business plans with operational plans with strategic plans.  The best way I usually describe it is that business plans talk about the business basics – general descriptions of the business, products and services, the market, competition, personnel, financial statements and projections and more.  Operational plans talk about execution.  What are we going to do this year and how are we going to do it?  They often incorporate sales and marketing, delivery and more.  Strategic plans, however, look at the long term.  Usually they look at a three to five year period.  It’s where you’re NOT today.  The strategic plan is designed to close the gap between where you are right now, and where you want to be. Let’s take a look at a few things that might help you along the way. Strategy execution → I have a quote in the signature of my personal email from Morris Chang.  “”Without strategy, execution is aimless. Without execution, strategy is useless.”   Strategic planning is useless if you don’t execute, and this is a great PowerPoint presentation on creating a culture of execution, and how it relates to your strategic plan.  Short, to the point...
Debt to Net Worth – The Pros and Cons of Leverage

Debt to Net Worth – The Pros and Cons of Leverage

An old bank customer of mine called me the other day. He was wondering whether he should borrow to finance an impending, but temporary, shortfall in cash flow later in the year. He had sufficient personal cash to inject to get over the hump. I advised him that he was better off in this case using leverage rather than an equity injection. Why? Simply put, leveraging the bank’s balance sheet to fund the temporary shortfall left him with cash for opportunistic inventory purchases, which could increase profits dramatically. Using all available cash removed that option. This is our second article on financial statement ratios and what they mean. The Debt to Net Worth Ratio Debt to Net Worth (also known as Debt to Equity) is the ratio of total liabilities on the balance sheet to owner equity. A company that had $500,000 of liabilities to $100,000 of owner equity would have a Debt to Net Worth ratio of 5/1. For every dollar the owner has in equity, the company owes five dollars to creditors. That would be considered highly leveraged. In some start ups, where the owner is injecting only 10% equity and the bank is financing the rest of the start up capital requirements (nearly always with an SBA guaranty) Debt to Net Worth can be 10/1. Most banks subtract intangible items like goodwill from the owner equity to get a ratio called Debt to Tangible Net Worth. What The Debt to Net Worth Ratio Means It is generally assumed that as companies mature, their Debt to Net Worth will improve over time. A company that does not improve...
FWS Weekly Business Roundup n.3

FWS Weekly Business Roundup n.3

It’s the beginning of June and it’s finally warming up here in the great Northeast.  There’s less than a month of school left for the kids.  Summer vacation plans are all the buzz at the virtual watercooler, and everyone is prepping for the great Summer business slowdown as offices become ghost towns and beach resorts is where things are happening. What better time is there to start looking at some of the tools you use, and to leverage some great ideas and inspiration from others to improve your small business.  Welcome to the Fair Winds Strategies Weekly Business Roundup, third edition. Managing Projects and Lists in a small business → I’ve been using Trello for a long, long time.  First of all, it’s free, and it’s a great small business tool.  You create a “board”, and then create multiple “lists” on the board.  You then populate the lists with “cards”.  Each card can contain checklists, group comments, attachments, due dates, people, voting and more.  As cards are updated, members of the board are updated.   Let’s look at a quick example of how I use it.  When we work with clients, we have a 200+ question checklist we go through to assess our client’s business.  How do we add questions to that list, but do it in a team way?  In Trello, we have three lists – general discussion, proposed questions and approved questions.  Everyone adds the questions they like to the proposed questions list and the rest of the group comments and votes on the questions.  The questions with the highest votes then move into the approved questions list, and...
The Current Ratio – What Does Your Financial Statement Actually Say??

The Current Ratio – What Does Your Financial Statement Actually Say??

In this series we will look at the various financial ratios used by bankers, buyers, and investors to evaluate the fiscal health of your company. While there are a great many ratios in common use, we are going to examine the most important and commonly used in financial analysis. The Current Ratio The current ratio is the ratio of current assets to current liabilities on your balance sheet. This is a critical ratio because it demonstrates whether the company is likely to be able to weather short term adversity without significant hardship. The current assets are all assets held by the company that can be converted to cash within one year. Typically this included cash, investments, inventory, and current accounts receivables. Even though some other assets may be sold or liquidated within a year, such as a building, there is no guarantee that liquidation would always happen within 12 months. Those assets are not counted as current assets. Current liabilities are those items that the company has to pay within one year. They are normally accounts payable and current portion of long term debt. It is expected that any fiscally healthy company will have enough current assets, that when converted to cash, are sufficient to pay off all the current liabilities in full. Therefore a company that has current assets of $500,000 and current liabilities of $500,000 would have a current ratio of 1, or 1/1. If, in this example, the current liabilities were $250,000 instead of $500,000, the current ratio would be 500,000/250,000 = 2, or 2/1.   Large, well established companies often have very high current ratios. While smaller,...
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