Your Cash Flow Story: The Most Important Scoreboard
by Scaling Up Coach, Mark Fenner
What story are your financials telling you and your leadership team? What financial scoreboard is your management team using to determine if you are winning?
A few years ago I challenged a friend who is a professional skeet shooter to a match. He laughed since I am not a skeet shooter myself. However, I said, “I bet I can win if I blindfold you before you take your first shot.”
He said, “Mark, that is crazy. In addition to being very dangerous, how can I hit a target I cannot see?”
I responded by asking, “Do you know what is even crazier? How many CEOs, entrepreneurs, and business owners are trying to get their teams to hit targets they cannot see.”
“You can't hit a target you cannot see, and you cannot
see a target you do not have .”
~ Zig Ziglar
The income statement and specifically revenue growth garner the most attention in an organization. Typically the focus is on revenue growth and controlling costs. The most effective entrepreneurs scaling up organizations focus on their financial statements uniquely. They align behind the balance sheet in addition to the income statement with a focus on growth in cash flow, profitability, and then revenue.
Below I am going to offer a unique perspective on the financial philosophies you should embrace and then leave you with a specific strategy to increase profits and cash for your organization. These are four critical pieces of your cash flow story.
The True Impact of Pricing Over Volume
Most managers dedicate little time to price. Cost control and sales increases typically dominate as top priorities. You should consider moving your pricing strategy as a top priority for this year. You may not realize that pricing power holds the biggest potential as a driver of profit.
Top-performing executive teams use the Power of One Tool to help them understand the correlation between sales revenue and pricing increases. Power of One considers the impact a 1% or 1 day change in the seven financial drivers management can control will have on profitability and cash flow.
Many managers believe a 1% increase in sales volume is just as valuable as a 1% increase in price. The truth is 100% of a pricing increase falls to the bottom line where a 1% increase in sales volume will only deliver your percentage profit.
The Power of One tool can be especially effective in helping you understand the true impact of discounting. How many times have you heard “we will make up for the discount on volume”. Yet it is not uncommon for an organization to need more than a 3% increase in volume to make up for a 1% discount in price. Taking the time to understand your specific ratio will help you be more strategic when considering price discounts.
If price has been ignored as a driver while the focus was shifted elsewhere, it’s time to get strategic and creative around price- you might discover this has been the missing piece all along.
Why Gross Margin is More Important Than Revenue
We just made the case for price being more important than volume when it comes to profitability and cash flow. Likewise gross margin is more important than revenue.
“Revenue is vanity, profit is sanity
and cash is king.”
~ Unknown
Revenue garners the attention when managers should be focused on maximizing gross profits and growing gross margin percentages. Many managers aren’t worried about a small dip in gross margin because gross margin goals are often set with “good enough” in mind without realizing the full connection between gross margins and profit.
If a leadership team’s strategy is based around a comprehensive understanding of the influence of gross margin, then “good enough” is no longer the baseline. When a leadership team is empowered with the tools and strategy to align the company with initiatives that grow gross margin, this can generate significant profits for the company.
Here’s an example:
Imagine a company with $10 million in revenue and a current gross margin of 56%. Many managers would accept a 4% drop to 52% as still great. However, If that same leadership team focused on growing that number an additional 4% to 60% gross margin, that 8% swing would generate another $800,000 in additional profit for the company. Imagine how an additional $800,000 could be invested to help the company scale.
Gross profit growth coupled with expanding gross margins are great measures of your strategy. Challenge your strategy with a laser-like focus on gross margins.
Using Cash Conversion Cycle as a Metric to Fuel Growth
Does your entire team have the same pulse on your cash conversion cycle? There are big benefits to looking for changes that can positively influence cash flow and what those dollars look like moving through the company.
Dell illustrates a great example here. In the early 1990’s Michael Dell saw that the company’s growth rate was rapidly outpacing cash flow. It took 63 days from the time Dell spent one dollar to see it come back into the business.
The team developed a laser focus: every 90 days, they worked on a different aspect of cash acceleration using tools similar to the Cash Acceleration Strategy tool Scaling Up coaches use. Over the course of several years, their cash conversion cycle went from 63 days to negative 21 days.
Consider the impact a negative cash conversion cycle would have on your overall cash flow and ability to scale your business. How much faster would you scale if you had your customers’ cash, on average, 21 days before you were required to invest a dime.
Leveraging Good-Better-Best Pricing to Improve Profits and Generate Cash
Do you have a good-better-best pricing strategy? Rafii Mohammed makes a great case in this Harvard Business Review Article. The benefits of a well thought out good-better-best pricing strategy are compelling:
Customers prefer having choices to feeling under an ultimatum. Three differently priced options can give your clients a sense of empowerment.
When faced with multiple options, customers tend to decide more quickly whether they are going to buy something, using their remaining time to focus on what.
The simplicity of the good-better-best strategy makes it highly compelling to senior executives and salespeople.
Three applications you might think about are:
As a defensive move attempting to stall or delay a competitor’s efforts. This was popular during the Covid Pandemic as progressive companies created low-end offerings to address diminished budgets while protecting gross profits.
As an offensive move geared towards revenue growth and new business generation. Is there an upper end of the market that could expand profits? This was General Motors’ strategy when it created Cadillac. Is there a lower end of the market you can serve without cannibalizing your current offering? This is what hotels and airlines are doing with pay-in-advance, non-refundable pricing options.
As a psychological choice to rely on what’s known about consumer decision making. The magic-of-the-middle occurs when the best option creates a price point that by contrast makes the better price seem like more of a bargain.
Which of these four elements are missing from your current cash flow story? How do you start to incorporate them into the big picture? These are important questions well worth considering and often come up in the context of working with a strategic business coach.
Key Takeaways
● Put as much or more focus on pricing strategy as you do increasing sales volume and generating cost savings.
● Make sure discounting is strategic and fits your business goals.
● Prioritize gross profit and gross margins over revenue.
● Drive to a negative cash conversion cycle so your customers fund your growth.
● Implement good-better-best pricing as a strategy to expand your market, improve gross margins and increase cash flow.
For more on this topic check out the webinar - Cash Flow Story - Getting Your Team Aligned
with the Most Important Scoreboard.
Learn more about Coach Mark Fenner by clicking here.