LEADING WAYS NEWSLETTER # 39
Speaker Tip of the Month
MEMORABLE PRESENTERS KNOW THAT KNOWLEDGE AND EXPERTISE ARE GENERIC.
HOWEVER, AUDIENCES PAY FOR YOUR POINT OF VIEW AND OPINIONS.
Instead of being an information dumper, focus your presentation around ‘war stories.’ What worked, what didn’t work, and how you would do it differently next time.
Remember, it is about what your audience wants to hear, not what you want to deliver.
And now on to Leading Ways ::::
Are we in business for fun, or profit?
In addition to great leaders being great communicators they are also very successful in Cashflow and Profit forecasting AND at delivering profits.
There are only three types of senior executives ::
- Those who are proven profit generators.
- Those who have proven they cannot generate profits, and
- Those who are as yet untested on their ability to generate cashflow and profits
I am still amazed about the number of large businesses which do not have reliable forecasting. For example, having a moving month-by-month, eighteen month cashflow forecast.
Add to this the lack of both Gross Profit and EBITDA/EBIT forecast and many businesses are truly flying blind. Without such tools the business has little idea of mid-course corrections needed if either profits or cashflow are significantly under forecast.
More businesses fail for lack of cash flow, than for want of profit.
The main sources of cash inflows to a business are receipts from sales, bank loans, proceeds of share issues and asset disposals, and other income such as interest earned.
Cash outflows include payments to suppliers and staff, capital and interest repayments for loans, dividends, taxation and capital expenditure.
Accordingly, net cash flow is the difference between the inflows and outflows within a given period.
"Just go out and make yourself useful.”
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A positive net cash flow over several periods highlights the capacity of a business to generate a surplus cash and, conversely, a cumulative negative cash flow indicates the amount of additional cash required to sustain the business.
Cashflow planning entails forecasting and tabulating all significant cash inflows relating to sales, new loans, interest received etc. and then analyzing in detail the timing of expected payments relating to suppliers, wages, other expenses, capital expenditure, loan repayments, dividends, tax, interest payments etc.
As stated, cash in- and out-flows within a given period indicate the net cash flow.
When this net cash flow is added to or subtracted from opening bank balances, any likely short-term bank or other funding requirements can be determined.
In my experience forecasting the amounts of, and timing of cash outflows is easy.
What appears to be more difficult is being realistic as to the timing of cash receipts arising from sales.
Equally hard is forecasting the dollar value and timing of sales themselves.
Salespeople rightfully are always optimistic.
I always use no more than 85% of the company’s revenue assumptions on the basis that if business owners, Business Unit managers and CEO’s were not optimistic about sales growth, then they probably would not be in business. I have found some on an accrual basis, still trying to substantiate their personal bonuses.
In the repositioning of businesses there were many situations where I saw a looming inability to meet either payroll or tax obligations.
Typical Cash Flow forecasting pitfalls
Be aware of the dangers of ::
- Overstating sales forecasts – if you are a business owner, have an “unreasonable friend” test your assumptions, or in larger organizations have someone independent test the sales assumptions.
- Probability of winning the business from a competitor.
- Likely sales order date.
- Likely delivery and billing dates.
- Typical payment history for each customer.
- Potential decision date in relation to each large sale.
Ignoring historic trends, or performance by debtors.
- Making unduly-optimistic assumptions about the availability of bank loans, credit, grants, equity…. the likely amount, and the timing of those cash inflows.
- Not looking ahead far enough, or perhaps ignoring seasonal slow-downs.
These issues can lead to under-estimation of the cash and other resources required to sustain or develop a business, with potentially disastrous consequences.
Having done this basic assumption and cashflow exercise, you should then compile "worst case” [my 85% rule], "most likely" or "best" forecasts. Plan according to your "worst case.”
What tool should I use for Cashflow Forecasting?
Are you just recycling cash, or making a profit?
I consulted to a chain of five retail stores and found that they were just recycling cash. As competitors cut prices, so did they! Without a real handle on the Cost of Goods Sold [COGS] their margins were just spiralling downward. Yes, unfortunately I closed the doors!
Remember, if a customer comes to you because of a cheap price, they will leave just as quickly when they find a cheaper provider.
Profit forecasting is yet another vital business tool.
A profit forecast is the amount of profit you expect to make at the end of a period, whether for the month, the quarter or year-to-date.
The monthly profit and loss forecast will consist of the following:
- Sales - This is the cash you receive during a period of time including what you are owed, minus what you were owed at the end of the previous period.
- Cost of sales - This will include items such as purchases (such as raw materials or items you buy to sell), labour (any employees who are directly involved with the manufacturing of your product) and other direct costs.
- Gross Profit - This is sales figure minus the total cost of sales. It is usually expressed as a dollar figure and as a percentage.
- Miscellaneous income - This is where you would put in the estimate figure of any other income you might receive that is not from the sale of your product or service. For example, interest from money invested.
- Overheads - all the general expenses involved in running the business.
- Net Profit - The net profit figure is the gross profit plus the miscellaneous income minus the total overheads. The net profit margin is also tracked.
Net profit is usually expressed as Earnings Before Interest and Tax [EBIT]; or Earnings Before Interest, Tax, Depreciation and Amortization, [EBITDA].
Rebates, discounts, volume discounts and the cost of money to support your payment terms all erode your margins, and so use them sparingly.
A starting point to profit forecasting is to analyse your gross profit margins, by ::
- Product Line
- By delivery contract, in the case of services
- By customer
- By customer industry type
So, what are your trends in each area? Often I hear “Our margins are better than last year.” That may be well and good, but “better than what?”
Are you benchmarking yourself to others in your industry? How to you rank in relation to the 10% in your industry; your industry mid-point; or the bottom 10% in your industry?
I believe that second place is nowhere, and so recommend that you benchmark to the top 10%.
As with cashflow forecasting, profit forecasting should be maintained as one of your business disciplines. Again this can be accomplished through developing a MS Excel spreadsheet.
Your starting point is obviously to look at historical trends by customer, customer industry group and product line.
Profit forecasting then involves seeking out anticipated future customer activity by month ::
- Understanding the product mix or contract margins of sales for each and every customer during the forecasting period – [usually 12 months] and then applying both the historical [worst-case], gross profit and the anticipated gross profit [best-case].
- Testing the assumptions of your sales team or contract management team, or if you are an SME, having your “unreasonable friend” test your assumptions.
- Plotting by month the sales and gross profit margins on a pro-forma Profit & Loss statement in order to understand your anticipated likely future result.
A MS Excel spreadsheet also allows you or your CFO to evaluate ::
- different sales and income scenarios for new products;
- current products in different lifecycle stages;
- sales to existing customers;
- sales to new customers in the same industry groups as existing customers;
- sales to prospects in new customer industry groups; or
- contract amounts and margins in the case of contract services.
Forecasting, particularly on a short-term basis (twelve to eighteen months), is essential to planning for business success.
The process of cashflow and profit forecasting assists in estimating future business performance based on the actual results from prior periods, together with assumptions about new business, and product or service-mix growth.
It also enables business owners or company CEO’s to modify the operation of the business on a timely basis.
Therefore forecasting allows those in charge to avoid losses or major financial problems should future results from operations not reach management’s reasonable expectations.
Forecasts - or Pro Forma Income Statements and Cash Flow Statements - also provide the most persuasive management tools in order to apply for loans or attract investor money, where they are based on sound assumptions and a good operating history.
Additionally, as business expands, there will inevitably be a need for more money than can be internally generated from profits. Forecasting will enable you to readily see this need.
Cashflow and Profit forecasting therefore are an imperative to business success.
Have a great week. As Conrado Generoso stated ::
”No man is capable of self-improvement
if he sees no other model but himself.”
Next month we will focus on Managing your Sales Effort for Sustainable Results.
Kind regards
Denis Orme
027-472-8610
www.leader-success.com
p.s. Call me if you are looking for a speaker for your next business meeting.