At the same time the business needs to be able to pay employees, bills and other obligations when they fall due, which is the issue of cash flow management.
For business owners who want to target a better profit, a better cash flow or a better cash position, one of the effective tool to use is what if analysis or Future Financials, where you know the current business position and want to target a future (better) business position.
The Future Financials identifies the desired goals in your business, and then shows how to fix it by focusing on seven key business drivers (price, volume, margin, overheads, inventory, accounts receivable, accounts payables). Example:
Typically a current position for a business may be that it has say:
- An overdraft of $100,000 or:
- It makes a small profit but it should be a bigger one or:
- t has a poor cash flow.
With this process, with the right what-if analysis or Future Financials tool and knowledge, it can effectively show you the best options to say:
- Reduce or eliminate the overdraft completely.
- Double or triple the profit if that is your objective.
- Fix the negative cash flow problem and give you positive cash flow.
The Future Financials procedure has two parts. It has a diagnostic part and a planning part.
Diagnostic part
In the diagnostic part, it adjusts and balances the seven Key Financial Drivers to show you what has to be done to achieve your financial goals, such as increasing your profit or eliminating an overdraft.
It might be a combination of actions required to improve the direct costs (labor efficiency and material costs), small price increases where appropriate, and overhead reduction to improve the profit.
It could be reducing inventory turnover, reducing accounts receivable days and stretching accounts payable days to improve cash flow and bank balances.
Using an appropriate powerful software tool and with the right knowledge, an enormous benefit can be gained in the analyses of the possible alternatives, quantifying them, as well as in choosing the most appropriate steps/actions.
Planning and implementation part
In the planning part, it is critical to plan the steps a business needs to take to target that future business position. Finally, it is important to be able to effectively execute such a plan and the deployment and utilization of an effective business system will certainly help.
The Result
The value delivered by this effective and powerful process can be enormous. It literally can improve the business hundreds of thousands of dollars a year in profit and cash flow by knowing what actions you (a business owner) need to take to achieve the desired goals.
It can change the situation of a business owner from:
• "What do I have to do to get to the desired next step?" to:
• "Now there is no doubt what I have to do to get to the desired outcomes!"
Eric Tjoeng is the Joint CEO and Senior Practicing Partner at CAD Partners CFO On-Call (www.cfooncall.com.au). He can be contacted at erict@cadpartnerts.biz.
