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How to Build a Business That’s Independent of You

If you allow yourself to be tied down by small details, you’ll never achieve the big picture vision for your company’s future prosperity.

Greg Fisher

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Learn how to build a business that is independent of you and has value – even when you’re not involved. Now’s the time to break free from the “Sucked in Syndrome”.

Do any of these statements apply to you?

  1. You are putting more and more energy and time into your business but not seeing the proportional increase in output from your efforts.
  2. You have not done any planning, training or systems development in your business in the past three months.
  3. The thought of bringing in new employees or part-time workers to help deal with an increased workload seems like more effort than it’s worth.
  4. Your business is almost totally dependent on the effort, ability and tacit knowledge of one, two or three people. If any or all of these people were to leave you would be in serious trouble.
  5. If you won a two week holiday to your dream destination that you had to take in the next month, you would seriously consider not going for fear that your business would not survive without you being there.

The more of these statements that you identify with the higher your chance of falling prey to the “sucked in syndrome”. The sucked in syndrome is the name that I have given to describe a situation in which business owners and entrepreneurs feel that “it is just too much”. They are “being pulled in too many different directions”.

The challenge of serving customers, paying accounts, managing employees, sending out invoices, answering emails and budgeting is totally overwhelming. A very high proportion of business owners feel this sense of being overwhelmed at a point in the business development process. Let’s try to understand why.

When entrepreneurs launch a new business, they initially do a great deal of the work themselves. If they start a software company, they write code; if they start a retail business, they serve customers; if they start a bookkeeping business, they balance accounts; if they start a training business, they deliver workshops. As a new business owner they also need to take care of a multitude of other things such as accounting, marketing, sales, hiring, training and customer service. Initially this works out fine.

With only a few customers, most early entrepreneurs find time to deal with all these responsibilities and they typically enjoy the diversity of tasks. They enjoy the feeling of being master of their own destiny and are willing to work hard to see their dream come to fruition. In this phase of the business development process there is typically a strong relationship between effort and output. The harder one works, the better the results.

But because the entrepreneurs are enjoying what they are doing and because they are motivated by a sense of ownership, they keep acquiring new customers. Initially new customers are a blessing but slowly the entrepreneurs begin to feel worn down and vulnerable.

The challenge of serving customers and taking care of everything else in the business becomes taxing. They start missing deadlines, fail to send out invoices, the books fall behind, they don’t have time or energy to hire new employees and the employees that are in the business are complaining that they need more guidance.

The natural response in this situation is to work harder. In the initial phase of business growth, hard work paid big dividends but now hard work is just not enough. Even though the entrepreneur puts in more and more effort, the effort does not necessarily result in output and the output to effort ratio starts declining (see the diagram). The entrepreneurs just do not have the capacity to keep operating the business in this manner yet they do not know how to get out of this rut. They have fallen prey to the sucked in syndrome.

The mindset for avoiding the sucked in syndrome – or for getting out of it – is very different from the mindset for solving problems in the business development process. Up to this point, the natural and fruitful way to solve problems was to work hard, to put in more hours, and to do more in the business. The mindset for avoiding or getting out of the sucked in syndrome is to spend more time working on the business and to spend less time working in the business.

Working in your business means operating like an employee, doing the day-to-day tasks that are required to keep the business running. Working on your business means creating your business as something that is separate from you, something that is self-sustaining without your input.

When working on the business you establish the direction for the company and develop the systems and processes so that the business runs smoothly even if you are not there. You train and empower others to do the work in the business. Michael Gerber, the best selling author of the book The E Myth Revisited, suggests that the most constructive way to frame the concept of working on your business is to “Pretend that the business you own… is the prototype for 5 000 more just like it… In other words pretend that you are going to franchise your business.”

The Franchise Mindset

Adopting a franchise mindset – pretending that you are going to franchise your business – is one of the most constructive pieces of business wisdom I have ever come across. A franchise (e.g. Nando’s, MacDonalds, Mugg & Bean) is a business format that is replicated over and over again. The founder of the franchise creates a system that delivers a product within very particular parameters (quality, taste, experience etc.) at multiple locations across the globe. To do that, the creator of the franchise needs to:

  1. Understand exactly what value the business should deliver to the customer
  2. Create a set of processes that can be operated by people with the lowest possible level of skill
  3. Capture all processes and practices pertaining to the operation in an operations manual
  4. Provide training and development to new employees so that they are able to effectively learn the system
  5. Be deliberate about the culture they wish to create within the organisation
  6. Specify how the brand is to remain consistent across locations

Although, on the surface, it may seem simple to adopt the franchise mindset, it is difficult to implement effectively. But if done properly it can have a massive impact on a small or medium size business. The remainder of this article will provide you with practical tips for adopting the franchise mindset.

Five Focus Areas for Adopting a Franchise Mindset

If you were going to start franchising your business in the next few months, there would be five aspects of the operation that you would need to focus on intensely to get it to the point where it could be replicated multiple times over. Even though you may have no intention of ever franchising your business, by focusing on these elements of operation, you will be creating a business which is independent of you and one which has value even if you are not involved.

1. Planning a Goal Setting

If you were going to replicate your business many times over, you would need to be clear on what you expect each operation to achieve in both the short-term and the long-term. As a business owner it is easy to become so busy just trying to get through the day that you lose sight of where the business should be heading in the future. Goals and plans drive behaviour but as the leader of an organisation becomes more and more busy it is easy for them to stop doing what is important (setting and monitoring goals) and to only focus on what’s urgent (getting orders out, dealing with complaints etc.). When this happens, everyone in the firm loses direction and focus. They become less and less efficient in what they do on a day-to-day basis and the organisation gets caught in a downward spiral of expending wasteful energy.

Take action: To assess your focus on planning and goal setting, consider these questions:

  • Do you have goals for the next 90 days, one year, three years and five years?
  • Do your partners and employees know what those goals are?
  • Do you have a plan in place to achieve each of those goals?
  • Do you have measures and tools to regularly assess your process in relation to your plan and your goals?

2. Systems & Processes

In the very early phases of a business development process, when only one person is responsible for a task, they can over time figure out the best way of performing that task. They learn through experimentation and slowly become an expert at what they are doing. A problem arises when that person leaves or wants to go on holiday, or when they are the business owner and they have more pressing issues to deal with, or when more and more people get hired to do that same job but need to go through the same drawn out learning process to acquire the knowledge and skills.

There comes a point in a business’s life where the processes that have been developed over time need to be captured and documented. This entails creating an operations manual for the business. If you were to franchise your business you would need to pass on a manual describing all the major processes and systems in the business to the franchisee. Developing such a manual forces one to carefully consider whether all elements of a process add value and to identify the best person to carry out such a process.

Take action: In adopting a franchise mindset in your business, consider these questions:

  • Do you have an operations manual describing the major systems and processes in your business?
  • Have you reviewed those processes with the people carrying them out to look for inefficiencies and redundancies?
  • Have you considered whether a person with the appropriate level of skill is carrying out each of the processes in the business? In most cases you should aim to have the person with the lowest level of skill necessary carry out a task. If people are too skilled for the tasks they are carrying out you are likely to incur excess cost and over-skilled people will get bored and frustrated.

3. Training & Development

One of the fundamental mechanisms used to empower others is training and development. A clear sign that a business is falling prey to the sucked in syndrome is when none (or very few) of the people in the business have been on any kind of training or development activity in the past six months. People in a business are either growing or they are becoming stagnant and unproductive. Training and development programmes are one way to keep them engaged and on an upward growth path.

If you were going to franchise your business, you would need to spend a significant amount of time training other people. This is one of the critical tasks for a business owner of an expanding business. Whether you are conducting the training or overseeing the process through which others are trained and developed, to adopt a franchise mindset, you need to take ultimate responsibility and ownership of the training and development process.

Take action: To assess the effectiveness of your business in this domain, consider the following questions:

  • Have all your employees been on some kind of training activity in the past year? Who has not been exposed to any training and development? Why?
  • Do you have informal activities within the organisation that encourage people to develop and grow e.g. brown bag lunch discussions, book clubs, mentoring arrangements, reading and discussing Entrepreneur magazine articles?
  • Have you been on any kind of training activity in the past year?
  • Have you spent any time passing on knowledge and training others in the organisation in the past 12 months? Could you do more?

4. Culture & Morale

One of the biggest challenges to creating a franchise is replicating and distributing an organisation’s culture. To ensure the right culture and employee morale across multiple locations, one needs to be very clear on the norms, values and assumptions that are relevant within the organisation.

Organisational culture can develop a life of its own. Therefore, if as the leader of a company, you pay no attention to culture, you are likely to wake up one day and discover that the norms, values and assumptions that are driving behaviour in your organisation are out of alignment with what you want them to be. A leader should own the culture of his or her organisation and as the organisation expands, so the leader should pay more and more attention to the culture that is emerging among employees.

Take action: To critically assess the culture in your business, consider the following questions:

  • What are the values of your company? Would all your employees agree?
  • What sort of culture are you trying to create in the organisation? How is this culture demonstrated in your behaviour and in the behaviour of the other employees in the organisation?
  • What are the things that carry and retain the culture of the organisation – language, rituals, stories, traditions, people or activities?
  • Is the culture and morale of the organisation getting stronger or weaker? Why?

5. Brand & Reputation

For anyone franchising an operation, one of the biggest risks is the potential destruction of the brand and/or reputation of the business. Prior to franchising a business, the franchisor will therefore need to be absolutely clear about the important elements of the business’s brand. In some of my dealings with Nando’s I have discovered that this is the most critical element of the franchising arrangement for them. They can’t allow a franchisee in a far off corner of the country to make a decision that puts the Nando’s brand in jeopardy. Therefore they are absolutely clear about what the Nando’s brand means and how it should be represented in every aspect of the business arrangement – signage, menus, greeting and customer service.

If you wish to build a business that is independent of you and has the ability to expand and grow in an effective way, you need to be explicit about what’s important for its brand. You need to consider both tangible elements (logo, colours, signage, design, communications, mantra) and intangible elements of the brand (brand values, behaviours, routines, service delivery).

Take action: The following questions will help focus your attention on brand and reputation related issues:

  • What does the brand of my business stand for? Would employees agree? Would customers or the public agree?
  • What are the strongest elements of my brand? What are the weakest elements and risks of my brand?
  • What elements of my brand do I expect to evolve and change over the next three years? What elements of the brand should remain steadfast?
  • What kind of employees are best for my brand?
  • What kind of customer does the brand of my organisation appeal to? Is this my target customer?

The Challenge
Adopting the franchise mindset is difficult when you first start out. After months or years of being manically busy with day-to-day issues it is challenging to take a step back and focus on the bigger picture. It takes immense discipline to work on your business and not be tempted to fall back into the trap of working in your business.

Greg Fisher, PhD, is an Assistant Professor in the Management & Entrepreneurship Department at the Kelley School of Business, Indiana University. He teaches courses on Strategy, Entrepreneurship, and Turnaround Management. He has a PhD in Strategy and Entrepreneurship from the Foster School of Business at the University of Washington in Seattle and an MBA from the Gordon Institute of Business Science (GIBS). He is also a visiting lecturer at GIBS.

How to Guides

What To Measure To Make Sure Your Business Won’t Crash And Burn

Let your customers measure success for you and you’ll have a better idea of how to reach your goals.

Harry Welby-Cooke

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If you don’t want your business’s spurts of success to end up just a flash in the pan, you need to measure your business progress against your goals. This allows you to adjust your plans for future success accordingly. But how?

Back in the nineties, NASA designed an interplanetary weather satellite to orbit Mars. However, it deviated from its planned trajectory and was destroyed in the atmosphere, simply because of a minor miscalculation; a result of the NASA team and their contractor using different systems of measurement.

By the same token, business owners need to determine what metrics to use to measure their progress, before they can work out what still needs to be adjusted to get them to their ultimate goals. Many businesses know this, but many don’t know they’re doing it wrong.

Connect with your customers

Most organisations use the same key performance indicators such as sales, customer retention, and product quality to track their progress. What’s the problem with this picture? They’re measuring where they are now in relation to where they were before, leaving the question of where they want to be, and how to close the gap, to guesswork.

Related: Good Customer Service Is About Relating At The Same Level

Why waste time testing one strategy after another when you can find all your answers in one place: With your current and prospective customers? They’ll tell you exactly where to aim and what to do to get there. This is why customer surveys are the proverbial toolkit of business progress tracking.

A customer survey is simply a series of questions that you ask your customers, to gauge their satisfaction, so you can hold on to them and collect ideas about how to improve your business offerings.

There are a number of ways to distribute these surveys, but it’s no surprise that social media is trumping phone calls, text messages and emails as the preferred platform for customers to communicate with businesses and brands.

Engage with your customers

What you choose to ask your customers is entirely dependent on what goals you wish to outline and track. That’s the easy part, but it’s significantly harder to gauge the effectiveness of social media campaigns, because you need to know what to look for. You can measure awareness of your business using metrics including volume, reach, exposure and amplification.

Retweets, comments and replies will tell you how engaging your content is, and you can keep an eye on traffic by tracking URL shares, clicks and conversions. Plus, there is a plethora of additional plug-ins to this from ORM and sentiment tracking tools for deeper analysis of this data.

Related: Does Your Customer Service Care?

The catch is that in the past, businesses had to compete for space — on billboards, in magazines, during ad breaks on TV — but now it’s all about timing. So the first challenge is making sure your social media post questions are being seen by as many of your customers as possible.

On the flip side of the coin, people don’t have to have any previous experience with your brand to interact with you on social media, so another challenge is calculating which of your respondents are actually viable customers.

Leverage your data

You’ll need to tap into the analytics that speak to who your followers are, and then focus on finding ways of channelling them on social media, based on their geographical location and the kind of content they are most likely to consume.

Then test your social media measurements against your key performance indicators. Yes, we’re back where we started, but this time you’ll be armed with what you need to leverage this data, in order to achieve your business goals.

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How to Guides

How Do I Go About Valuing My Business?

Francois Otto, Head of Corporate Finance and Jonathan Wernick, Corporate Finance Transactor, Sasfin Capital give advice on how to value a business.

Sasfin

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Francois Otto, Head of Corporate Finance and Jonathan Wernick, Corporate Finance Transactor, Sasfin Capital give advice on how to value a business.

If you have ever thought about raising capital for, or selling, your business? Perhaps one of the most difficult questions you have had to ask yourself is “How much can I sell my business for?” Regardless of what anyone tells you, determining the value of your business is a subjective process.

The value of business in one person’s hands can be completely different to another. However, there are a variety of methods to determine the value of a business. Some methods are fairly simple and others are a bit more complex.

Perhaps the simplest method that can used to value your business is to determine its Net Asset Value (“NAV”). This simple method entails subtracting the value of the liabilities from the value of the assets.

Related: Raising Capital Through A Black Economic Empowerment Transaction

Another method that can be used to value a business is to apply a specific multiple to a financial metric. This method is referred to as a comparative valuation or “MULTIPLES” approach. For example, a company’s net profit could be multiplied by a specific number to give you a value of the business.

The number which you multiply the earnings by is referred to as a “Price Earnings” or “PE” multiple. The size of this number will depend on the business in question, for example its growth prospects, its size and the industry in which it operates, just to name a few.

The final approach that can be used to value a business is the discounted cash flow (“DCF”) method. This method adopts the philosophy of “Cash is King”.

Under this method, the business is valued using cash flows that the business is expected to generate. Cash flows can take the form of future dividend payments or, if the business pays a small or even no dividend, cash flows can take the form of profits generated by the business after adjusting for future capex, investments in working capital and taxes payable.

As this method values a business using the cash flows it is expected to generate in the future, a discount needs to be applied to these future cash flows (to reflect the uncertainty thereof), the size of which increases the further out in the future the cash flow occurs. The aggregate value or sum of these discounted cash flows represents the estimated value of the business.

Related: Here’s How To Value Your Business

The three valuation methods (NAV, MULTIPLES or DCF) mentioned above can yield different values for a business and deciding which method to use will often depend on the purpose of the valuation as well as the specific business being valued.

This exercise is normally the first step in raising capital or selling your business, to provide the owners with a sense of value. This value is theoretical until such time as a willing investor agrees to a transaction.

This is where a good adviser will assist the owners, through effectively marketing their business, to optimise the value achieved by the owners with the added benefit of ensuring the terms of a transaction are fair to the owners (e.g. reasonable earn-out conditions and warranties).

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How to Guides

How You Can Use Your Creditors To Fund Your Business Growth

Everything you need to know to keep your cash flow positive, use your creditors to fund your business, and make your numbers work for you.

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The success of a business is often judged by its rate of growth and its number of employees. The problem is that both a business’s rate of growth and its size come with their own demands and consequences, which are often ignored in the pursuit of more and more growth.

The reality is that not all growth is created equal. If your business doesn’t have scale, you can end up growing yourself into trouble — or even out of business.

Even more important is positive cash flow. Is that great new contract bringing in money, or costing you money? Shouldering an upfront cost for growth down the line is all part of the growth journey, but only if the numbers make sense and you know when your investment will turn to profit.

Here’s the secret to growth: It can be self-funded. Yes, there are venture capitalists, private equity firms, angel investors, bank funding and a host of other ways to access finance — but you can grow a large, successful organisation without any of these.

The trick is to know your numbers. Here’s how you can practically apply the rules of positive cash flow to your business.

Related: 6 Ways To Make Your Business Look Big While You’re Still Growing It

The Power of Cash

In 2012, Amazon’s share price was $173. By 2016 this had grown to $725. Walmart, arguably the biggest retailer in the world, went from $59 to $70 in the same period.

But take a look at Table 1 for the revenue growth of both companies between 2003 and 2012 (a trend that has continued).

revenue-growth

How can Walmart’s stock price have hardly increased, while Amazon experienced impressive growth over the same period, despite the fact that Walmart’s revenue growth far outstrips Amazon’s (in absolute, not percentage terms)? Is Walmart’s stock undervalued, and Amazon’s overvalued? Even accounting for growth off a low base, how can we explain this?

The share price is simply the net present value of future free cash flows generated from the efficiency of an organisation in managing cash to generate more sales.

In other words, Jeff Bezos’ focus on his cash conversion cycle has meant his business is incredibly cash-positive, which has in turn positively impacted Amazon’s stock price. Although Amazon is a highly unusual business with its negative cash conversion cycle, and its actual liquidity is somewhat contested by the investment community, it’s a great example of getting customers to fund growth.

Related: Five Keys To Unlock Massive Leaps In Profit

The Cash Conversion Cycle

We agree that it takes money to make money. A business, even one with a tight, scalable business model, will consume more cash in its growth phase than in its steady state, or execution phase.

But, you don’t want to ever spend more money than you need to — or can reasonably afford to. This is true whether you’re self-funded or spending someone else’s cash, but particularly if you’re funding your own growth. Dealing with unplanned funding can be costly, time-consuming and it hampers growth. It also bogs you down in stressful admin when you could be focused on the elements you love and that excite you.

There are two questions that you should have asked yourself as you embarked on your growth journey (note: if you’ve never asked these questions, you need to surround yourself with like-minded business people who can help you find and ask them):

  1. For what period of time is my money tied up in inventory and other current assets before customers pay for the end product or services?
  2. How much cash do I need to finance each unit of sale and what is the amount of cash generated by each unit of sale?

I guarantee you that Jeff Bezos knows the answers to these two questions. Not his accountant or financial director — Jeff himself. You can’t abdicate the numbers of your business to someone else. Understand the difference between delegation and abdication. You don’t need to be doing your business numbers but you absolutely need to know what they are. This is one of the most important metrics of your business.

Let’s go back to our example of Amazon (see Table 2): Bezos’ cash conversion cycle (measured in days), oscillates between -40 and -8 days. That’s the secret.

In other words, Amazon uses other people’s money to fund its operations. That’s an extremely valuable business model, as its share price demonstrates.

Walmart’s cash conversion cycle is also a very respectable 11 days. As a business model it’s not quite as valuable as Amazon’s, but there’s a reason why Walmart is an international leader in its industry. It takes this behemoth organisation just 11 days to convert $1 into something worth more than $1. It then recycles that original $1 a further 35 times per year. Walmart’s margins are not high, but the compound growth is very powerful, as we’ll see later.

Let’s Get Started

starting-to-fund-a-business

Step 1: Understand your business

To better understand the components of your operating cash cycle and your cash conversion cycle, take a look at Diagram 1.

cash-conversion-cycle

Operating cash cycle (OCC) is the period of time between when you start the assembly of all the required inputs into your production line, and cash comes back into the business as payment for the sale. Remember, if you’re a B2B business, there’ll be a delay between when the customer starts using your product and service, and when payment is made as well. This difference is referred to as accounts receivable days. Likewise the time between when your production starts (having received inventory) and the moment your business pays for this inventory, is the accounts payable days.

Cash conversion cycle (CCC) This is the period of time that working capital is tied up. It’s the time between when cash was converted into one of the inputs for your production line, and when the product is converted back into tangible cash, handed to you when customers pay you in real money. It’s the difference in time between your operating cash cycle and account payable days.

Self-financing growth rate (SFG)

This is the crux of this article. Your SFG rate is the rate at which growth can be sustained by cash generated by your business without any external funding.

Related: Why The Climb To The Top Is The Most Critical For Your Growth

Step 2: Working out your cash conversion cycle

Where can you access the figures you need to determine your own OCC, CCC and SFG? First, use data spanning a 12-month time period. This has two advantages: You have a better chance of sourcing accurate data if it comes from a signed off financial statement, and you can dampen the noise caused by seasonality.

Work with your balance sheet and income statement.

Working out conversion days from balance sheet

Asset ZAR amount on (000) Equivalent days Liabilities ZAR amount on (000) Equivalent days
Cash 10   Accounts payable 99 Calc A
Accounts receivable 384 Cal B Loan

repayments

50  
Inventory 263 Calc C Current liabilities 149  
Current assets 657   Retained earnings 183

 

 
Plant & equipment 25   Capital contributed 350  
Total assets 682   Total liabilities 682  

 

Working out conversion days from income statement

IS line ZAR amount on (000) Day equivalent Ratio
Line ZAR amount on (000) Day equivalent in (000) Ratios in %
Revenue / Income 2 000 = 2 000/365 = 5 479 100
Cost of sales 1   200 = 1 200/365 = 3 288 60
Profit 800   40
Operating expenses 700 = 700/365 = 1 918 35
NPBT – net profit before tax 100   5

income-statement-valuation

Based on the above example and figures, we have determined the following information:

  • This business generates R5 479 of income per day at a cost of R3 288 per day.
  • Calculation A: We owe a total of R99 000 to our suppliers, which at
    R3 288 per day is ~ 30 days from
    99 000 / 3 288
  • Calculation B: We are owed R384 000 from our customers, which at
    R5 479 per day is ~70 days from 384 000 / 5 479
  • Calculation C: The amount of inventory we have paid for and need to turn into a sold product in equivalent days is ~ 80 days from 263 000 / 3 288.

Our original ‘as-is’ timing diagram now looks like this:

cash-cycle-advice

We still need to account for operating expenses, including salaries, utilities, rent, marketing costs and so on, and we can safely assume (but check this for your business) that bills arrive uniformly over the 150 day OCC period, meaning some will be paid immediately (day 1) or have to wait (day 150). On average this is 75 days.

You should now interpret the information as follows;

  • The OCC is 150 days, but because the business has 30 days to pay its suppliers, the CCC is 120 days. In other words, cash is tied up for 120 out of 150 days (80% of the time).
  • In terms of operating expenses, we assumed a uniform distribution over the period whereby some creditors would be paid immediately and some would have to wait for the 150-day cycle to finish. On average, this leaves us with 75 days or 50% of the OCC.

Related: Mobility, Security And Your Business

Step 3: Unlock capital in your business

We now know for how long our cash is tied up, but we still need to determine how much is tied up. Using the ratios in the original income statement, we can now answer the following: What amount of cash is needed to finance each unit of sale, and what is the amount of cash generated by each unit of sale?

Cash conversion at work on your IS

Income statement line Per ZAR with CCC factoring effective per ZAR
Revenue/Income 1,00    
Cost of sales 0,60 80% (120/150) 0,48
Operating expense 0,35 50% (75/150) 0,18
Total costs 0,95 Cash tied up per 1 ZAR of Sales Revenue 0,66
Profit before tax 0,05
Free cash generated per ZAR of Sales 0,05 Cash needed for each OCC 0,66

Putting it all together

Let’s look at what you now know about your business:

Self-funded growth rate

The cash generated from 1 ZAR of sales By looking at the income statement ratio 0.05
The time in days of your OCC Calculated from holdings inventory days + accounts rec days 80 + 70 w= 150
The CCC time to cycle cash used in the OCC Calculated from OCC – accounts payable days 150 — 30 = 120
The cash tied up in each OCC for a 1 ZAR sales income Restated IS with CCC factored in for OpEx and inventory 0,18 + 0,48 = 0,66
Your per cycle growth rate Free cash that can be added to the OCC cash requirement 0,05 of 0,66 -7,57%
How many cycles can be completed in a year? Days in year available divided by OCC 365/150 = 2,43
Assume a productivity factor for safety 90% as a reasonable contingency for strikes etc 2,43 x 0.9 = 2,19
Compounded annual self-funded growth rate (1 + SFG) OCC cycles – 1) = (1 + 0,0757) 2.19 – 1 = 17,3%

Driving growth in your business

So, how can you use this information to drive growth in your business?

First, your debtors book must exceed your creditors book. Then, if we just shorten our accounts receivable days from 70 to 30 days, the following would happen:

  1. The OCC is now 150 — 40 = 110 days
  2. CCC is 110 — 30 = 80 days
  3. Cash needed for cost of sales is 0,60 X 80/110 = 43 cents
  4. We have not targeted operating costs yet, which remain at 18 cents
  5. Round everything up and we now need 62 cents instead of 66 cents (6% improvement)
  6. Your per cycle growth rate is 5 cents/62 cents = 8% growth rate
  7. How many cycles can you do in a year now? 365/110 = 3,3 cycles; up from 2,43!
  8. This is a 36% improvement
  9. Add a contingency of 95%, which gives us 3,13 cycles
  10. Compound this over a year: (1+ SFG) nbr of cycles — 1) = (1 +0,08) 3,1 -1) = 26% from 17% originally.

That’s 9% growth and nobody noticed a thing!

Related: Jason Goldberg Asks Are You (Realistically) Ready To Scale Your Business?


Key takeaways

  • That large corporate account that you cherish and that one of your sales executives is overly proud of landing may well be destroying value in your business. Why? Because large corporate accounts tend to get over-serviced (and I doubt you allocate those costs properly) and tend to pay you late.
  • Growing with a greater number of smaller customers, steadily over time, within your means and without being bullied delivers more value and less stress.
  • There are easy and clever ways to add lots of value to your business, that cost very little to implement, but you do require an understanding of how cash gets tied up.
  • Delegate, don’t abdicate. No entrepreneur is ever great at sales, production, operations and cash management, so get people who can complement your skill set, and allow you to do what you enjoy. That said, you can never hand the numbers over to someone else. Receive assistance if you need it, but know your numbers!

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