Are you interested to see how a business, let’s call it QuickCall Supplies, that turns over $1 Million dollars in total revenue… can add over $100,000 to its cash flow and improve its profit by $60,000… without selling one extra thing and still paying its suppliers in time?
What you’re about to read is genuinely possible and improvements, some similar, some smaller and some better could be made to ALMOST EVERY business in the country!
The secret to good financial control is knowing what to control and by how much. In the posts that follow, over the next few months, you’ll read about the ‘Seven Key Numbers’ and see how each number works in more detail.
In this post, we want to give you an early example and explain how the ‘Seven Key Numbers’ might work in this example business QuickCall Supplies – with a turnover of $1 Million dollars.
The ‘Seven Key Numbers’ is not a new concept. They have been around since Adam was a boy. It’s just that they have never been presented and explained in the way we plan to do in these posts. They apply to all businesses and work to a greater or lesser extent, depending on the business type. In these posts we’re not going to try to explain how they impact all types of business. It’s just sufficient to know that they are almost ALL you need to know to be a good manager and controller of your business finances.
With QuickCall Supplies we will make small achievable adjustments, over the course of twelve months, to just five of the seven numbers and calculate what a difference each makes individually and then to the cash flow and bottom line in total.
Let’s explain them one by one and assume we’ve discussed and agreed these changes with the business owner of QuickCall Supplies. Our “map” of the Key Financial Numbers, as applied to this business, comes next and that’s followed by a short explanation of each number. You will see the change planned to the Number in the box on the left and the savings created by that change in the box on the right.
KEY NUMBER No. 1 is REVENUE GROWTH or more sales. In this example that is not going to change to demonstrate that making more sales is not always the answer to better cash flow and profitability.
KEY NUMBER No. 2 The next driver is PRICE CHANGE! Let’s say we can put up prices (on average) by 2%. Not much. Costs have risen for us; fuel is more expensive etc so we agree 2%. See the improved cash flow.
Note: Even 1% would be good!
KEY NUMBER No. 3 is COST OF GOODS SOLD
%. We’ve agreed that we can decrease this by just $1 in every $100 (1%) negotiating with suppliers on some items.
Note: That’s just 1% – improve this by 2% – double
KEY NUMBER No. 4 We’ve also agreed that we can reduce the OVERHEADS % by considering each line item on our Profit & Loss Statement and will find at least 6% savings. This saving goes straight to the bottom line.
Note: For every 1% improvement add an extra $3214 to profit!
KEY NUMBER No. 5 Next we’ll look at improving our ACCOUNTS RECEIVABLE or Debtor Days, as it’s also known. Many small businesses are hurting, because their working capital is being used by their customers, rather than it being in their own bank account. A reduction of just 11 days brings in an extra $32,275!
Note: That is $2934 for every one day improvement here!
KEY NUMBER No. 6 ACCOUNTS PAYABLE DAYS – and in this case there is no change.
KEY NUMBER No. 7 What about QuickCall Supplies’ stock level? DAYS INVENTORY that’s called. Can they bring that down by just 10 days? If they were a service or jobs based business the equivalent to this would be Work in Progress. That makes a positive difference of another $20,557!
Note: That’s $2055 for every one day improvement!
That’s it. In this case we have shown, a BIG improvement in cash flow and profit, by adjusting just FIVE of the Seven Key Numbers… without the business selling one extra dollar of goods… and still paying its suppliers on time
The value now created for this business is that it improves cash-flow by $100,311 and creates additional profit of $60,383.
This is valuable cash that the business can use to reward its shareholders and/or for working capital! In your business it may well be that you can’t improve, increase or decrease the same numbers as did QuickCall Supplies*, but it may be that you can improve or adjust other drivers.
*QuickCall Supplies is a purely imaginary business the financial history of which is to illustrate the value of the Key Financial Numbers. It is not related to any client or business known to the authors.
By making small but sustainable changes to these numbers … as part of a plan … the results can be amazing!
Look out for our next blog post for more detailed information about each of the Seven Key Numbers and ways to improve them.
If you don’t want to wait for the next blog post and you’re keen to get started improving your Seven Key Numbers right now… Download our eBook ‘The Seven Key Numbers that Drive Profit and Cash Flow’