Uncover Cash Flow Killers with These 4 Processes

When we recently asked CEOs what their companies most lacked when addressing ways to boost cash flow, a surprisingly large number cited something they probably have an abundance of but don’t tap into: analytics. Relevant analytics can identify and measure the performance of virtually every activity performed in your business. But which analytics are right for you? Your business is unique and there is no better exercise than comparing actual results from projections to uncover actionable insights. The good news is you can uncover cash flow killers with these 4 processes.

Uncover Cash Flow Killers with These 4 Processes

CONTROL

Ensure accurate and timely financial records.

FORECAST

Deliver critical decision making data.

COMPLY

Financial disclosure and fraud prevention.

MEASURE

Measure key performance indicators.

Change is tough: bridging the gap between what you have and what you want is tricky business.

When we decide to go somewhere new we feel both hope and fear. Hope that the destination will be as pleasant as we imagined, filled with people who want to give us the warmest of welcomes and shower us with kindness. And fear that we might be waylaid before we arrive by dark forces, or that we get there only to discover it is a bleak, friendless place. As you embark on your journey towards a new future, should you be worried or optimistic? You have good reason to be optimistic in your break from the status quo. Making a conscientious decision to improve results does require making a commitment to change.

So where do you start? Who’s responsible for the initiative and guidance? Who’s going to take the lead?

Why can’t company leaders seem to enhance their teams’ efficiency? Often leaders aren’t sure where to turn when facing external changes impacting business. Accustomed to processes that used to work and incumbent team hierarchies, executives often struggle to embrace employees’ original ideas or analytical approaches to new directives. By definition, such ideas haven’t been tried before, so leaders worry they won’t succeed. But by clinging to concepts that have worked in the past, leaders teach workers that their fresh ideas aren’t wanted.

Because most businesses don’t have a timely, effective analytical review process in place, the need becomes mission critical. Why, you ask, is your internal controls audit critical to your business?

Employees on every level of your organization want to succeed

Employees on every level of your organization want to succeed. They want to do their jobs well, and learn to do them better every day so they can advance their careers. If they aren’t given career development opportunities, but instead given a sense of “job security” you may be stunting their growth, along with your company’s. There are opportunities to uncover cash flow killers in a number of analytics regarding employee development, advancement and turnover.

Related: Don’t Confuse Loyalty with Talent

Hiring, firing and resignations are unproductive and expensive. Employee tenure, advancement and turnover are just a few examples of valuable analytics that executive leadership can have a firm grasp on.

If you’re not sure who is best positioned to undertake the task of designing, implementing and optimizing your analytics platform, ask your CFO. If you don’t have a CFO, you can still start with the finance staff you do have.

Your finance staff can play a major role in helping validate data so your entire organization can make informed decisions to drive sustainable revenue growth and quality of earnings. Start by leveraging your finance staff to uncover cash flow killers with these 4 processes.

Most companies separate their “analytical” workers from their “non-analytical” counterparts

Perhaps the issue lies partially in the corporate conception of analysis. Most companies separate their “analytical” workers from their “non-analytical” counterparts, which effectively walls off company decision makers from those who measure its performance.

Separating decision makers and analytics might work when business is good, but it inevitably costs companies when the landscape shifts. Whether leaders like it or not, the only way to combat catastrophic failures is with smaller, more manageable ones. And the only way to facilitate small failures is to create the sort of environment where risks are measured and contained when results suffer.

 

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Why do some work environments promote financial, operational and results analysis while others squash it? The key difference is psychological safety, a sense of security that employees must feel in order to offer up analytical ideas.

Psychological safety can’t be dictated, though. It must come from cultural processes, protocols, and tactics that allow ingenuity to thrive. Culture derives from expectations. It provides the resources available and defines the rules everyone in the organization will abide by to achieve expectations. In business it is critical to establish expectations in FASB’s standard financial format – accounting.

Uncover cash flow killers with these 4 processes.

1. Control your numbers

Ensure accurate and timely financial records. This means your accounting is done with acute precision – carefully consider what line items are critical, which are informative and which are wasting space and difficult to measure with any consistency over time. Here’s a great example: a CPA I know and I were talking the other day and he told me about his “favorite” operating expense line item he had recently come across. Want to know what it was? “Amazon.” That’s right, “Amazon” was the best the company could come up with to classify things they were buying from Amazon.com.

Controlling your numbers gives you the ability to improve your operations by controlling spending and cutting unnecessary costs. Consistency in the line items you use provides consistency in expectations. It’s great for you, great for your team and in the event you ever need a loan from a bank or equity raise by an institution they are going to demand it. Consistency in your Income Statement and Balance Sheets month to month, year over year will provide you the ability to lead with confidence, pivot when something changes and ultimately support a stronger business valuation in the eyes of buyers.

My introduction to reading financial statements, and accurately analyzing them came not via an accounting background, but via my career start in Mergers & Acquisitions. Yeah, valuation. It’ll really force you to learn the value of accounting acumen in short order. And it’s invaluable. For a lot of reasons.

2. Forecast before beginning work

Deliver critical decision making data. One of the most obvious reasons to control your numbers is it gives you the opportunity to forecast the outcome, the results of your business’s activities and efforts. The better you understand your market, your customer’s pains and the economics of your supply chain and distribution channels the better you will be prepared to identify inefficiencies and fix them. To profit from them.

Doing this before beginning work forces you to establish the assumptions and variables behind your forecast. This is critical to accurate forecasting. You can do this with each and every line item on your Income Statement and Balance Sheet – but make sure your financial model is accurate and the sequential drivers are organized accurately. Which do you forecast first? Revenue? Operating Expenses? Cash balances? Click here for a simple financial forecast model to get you started.

Because your primary output is achievable financial forecasts and complementary KPI targets, discipline is part of every project you take on. But that doesn’t mean you just throw numbers at a wall until you spot something you like. Instead, you begin by defining what the market, sales staff and operations can handle. While results will vary, the values that underpin the forecast should stay the same. This gives you the insight to make valuable changes when you uncover systems that don’t work.

More of what doesn’t work doesn’t work

For example, we recently worked with a SaaS company that wanted to hire more developers to serve its current customer base, but was unsure what the landscape looked like for new customers. Handling covetous sales people is a whole other topic. While we didn’t have an answer in mind from the start, we did have a series of principles. We wanted our solution to reduce uncertainties, give executive management actionable steps for success and show them a vision for the future. We sought to build something that management and staffers would love on first sight and want to continue using well into the future.

Determining your own forecasting principles is a matter of asking questions upfront: What’s the most impactful forecasting problem you could solve? What audience could your solution help? What does that audience care about? Those answers are the bedrock principles your forecast should stick to.

3. Comply with all regulations

Financial disclosure and fraud prevention are key to stability. Your business may not be in a common “regulated” industry like drug manufacturing, cannabis production or sales or something that requires a license to operate, but you still have lots of legal regulations to comply with. These are most commonly found in employment, accounting (e.g. revenue recognition, personal expenses and tax calculations) and sales and marketing tactics.

Pay strict attention to these regulations because repercussions of deviation from the law can be a real distraction from the business for management. They can also be very expensive. Legal noncompliance is a major cash flow killer when uncovered.

 

4. Measure every activity relentlessly

Measure all the relevant key performance indicators, not just those that are in your favor.

Quality control is critical to optimizing profitability. Whether you sell a product or a service, delivering the best experience to the customer efficiently means you are working productively. You will know this only by measuring every activity relentlessly. Every M&A deal I’ve ever worked on involves financial projections. Because deals take time to get done we are constantly called on the carpet to explain variances in monthly or quarterly projections. And they are always off.

There is only one true statement that can be made regarding financial projections. They are always off, it’s just a matter of in which direction and by how much

No matter how much you’ve put into your finance team and systems, it’s unlikely to be the right one. Get team members comfortable with a constant flow of iterative, experiment-driven ideas by giving them the freedom to fail. Only with that freedom can employees relax and take risks, and only with regular risk-taking can breakthroughs occur.

What if your team isn’t yet comfortable with failure? Celebrate it when it happens. Ritualize learning from mistakes, missteps and misunderstandings. At the end of each week, write down what your team learned in the past seven days. Then, share your revelations. Doing so creates healthy distance between failure and judgment, reinforcing the idea that trying new things is more important than being correct.

Productivity isn’t as elusive as it appears to most executives. It bubbles beneath the surface of every team, bottled up by the fear that new ideas might fail. Releasing it is a matter of realizing that everyone can contribute to the team and that everyone’s contributions are valuable even when they don’t pan out. By setting achievable expectations, forecasting measurable results and company-wide accountability you can uncover cash flow killers with these 4 processes.

 

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