How to deal with underperformance: Mind Your Own Business – Episode 3

Here's a simple 4-question framework you can use to get to the bottom of underperformance issues in your business

How to deal with underperformance: Mind Your Own Business – Episode 3

Here's a simple 4-question framework you can use to get to the bottom of underperformance issues in your business

Hi, I’m Marco Soares, and this week I want to show you the money Picture the moment; you’ve been eagerly awaiting your P&L all week. Finally, it has arrived.

 You look through the figures, you look at your turnover; it’s precisely where it needs to be, going through the margins, cost of sales, everything’s great as you go through your overheads, everything’s more or less where it needs to be, you get to the net profit line, and it’s amazing – you’ve hit your target, you’ve done a great job, and you’ve achieved the exact net profit that you wanted to. 

As you’re about to give your team high fives, they’ve done such a good job all month you’re just about to pat yourself on the back, and then you realise; hold on, where’s all of that cash?

Because I don’t have all of that cash in my bank, what is going on? Well, let me show you the money. If you are like many other business owners, the thing is, you’re only looking at your P&L, and therefore you have a one-sided view of what’s going on in your business. 

 Profitability is essential, but the thing that I think is even more important is your company’s ability to turn profit into cash in the bank. Unless you understand your working capital cycle, you won’t be able to detect if any issues are going on there that might be causing frustration down the line.

 So what is a working capital cycle? Well, an operating capital cycle is all about your company’s ability to move cash through debtors, creditors, work in progress if you’re a service company, or stock if you are a trading company. And if you have any inefficiency in this working capital cycle, it will be a longer cycle than it needs to be, which means that it will take longer for money to move through your company. In reality, what that means is you need to finance that gap. 

So let me give you some stock figures; if we look at this company of £4 million turnover with an operating profit of £450,000 you look at this, and you think, wow! These guys are on fire, and they’re doing well with high profitability, but let me show you these figures so as you look at this, you kind of think, okay, so what is this telling me? Well, if you only looked at the P&L, this company would be on fire, but as you start to look through these figures over here, their debtors are pretty high, they’re holding lots of stock, and they’re paying people too fast. What you’ll find is that this company has a cash gap of 128 days. 

In reality, what that means for this business is that they have to find the cash to finance that gap. So they need to see about £875,000 to finance this gap in their business. Furthermore, it is crucial information because every additional million in turnover that this company adds means that they’ll have to find an extra £220,000 in working capital to trade through that further increase. 

Now, suppose you don’t understand what your working capital cycle is. In that case, the chances are that you’ll probably be trying to fix your short-term cash flow issues with more sales or by trying to put your own money into the business or in attempting to secure more financing from banks. That is not the fundamental issue that you need to address. What you need to understand is whether you have got inefficiency in your working capital cycle. So what should you do about it? Well, the first thing you need to do is crunch the numbers. 

Find out what this looks like in your business because if you have ambitions to grow your business, then you will find that you are going to run out of cash fast, especially if this is exacerbated by you having to invest in additional infrastructure or equipment to be able to grow your business. 

The next thing you need to do is get your team together and come up with a plan to sort out where the bottlenecks might be. Do you need to look at debtors? Do you need to look at creditors? Do you need to invoice faster in terms of work in progress? Or is it that you need to be able to reduce your stockholding and reduce the dead stock? It’s a really important concept and one that you need to spend the time to investigate

If you’re looking for more small business tips, then we’d like to see you every week on “Mind Your Own Business,”

Marco Soares is an award-winning business coach in Sussex and is available if you’d like help implementing these tactics.

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