The A-3 Targets Exercise

The A-3 Targets exercise is a great way to bring some discipline to your financial planning function.  A-3 is short for “Annual” and “3 Months”.

Philip Campbell describes the process in a recent blog post.

 

Philip-Blog-Post-A3-Targets

Small Data, Big Results

It seems like you can’t turn around without reading yet another article about Big Data and how it is transforming our lives as business people and entrepreneurs.  Big Data is everywhere:  page views, visitors, clicks, eyeballs, cookies, the Twitter fire hose,  cross referenced databases – you name it – we are inundated.  A month or so ago there was an article in the Wall Street Journal about Data Scientists – the next Big Thing in occupations you wished you had gone into when you were first starting out.  Companies are paying $200,000 to $300,000 a year for the privilege of employing these people to sift through mountains of data – overflowing warehouses of the stuff – to discern tiny shifts in consumer behavior that can translate into millions of dollars in sales if you get it right.

But first things first.  You’ve got to make sure you are making money and creating cash flow.  It doesn’t matter how good you get at mining data if you run out of cash in the process.  If you haven’t done so already, read Philip Campbell’s classic book “Never Run Out of Cash.”  He’s got a new one in the works on Financial Forecasting for CFOs and Controllers to help you turn financial analysis and forecasting into a strategic advantage for your company.  We at SurvivalWare applaud Philip’s approach, and are determined to help you focus on the Right Data.  Starting with a small amount of data – historical financial statements and a few key drivers – and combined with decent analysis and modeling – can produce big results.  That’s right:  small data, big results.  SurvivalWare is a tool that can help make this happen.

Understanding Your Cash Flow in 10 Minutes or Less – Webinar May 20, 2104

We just put the finishing touches on the content for today’s webinar featuring Philip Campbell and his Cash Flow Focus report.   The Cash Flow Focus Report is designed to help you understand your cash flow in 10 minutes or less each month.  There are still seats available – so please register if you haven’t already.  A link to the recorded webinar will be sent to all who register.

In addition to Philip’s spiel, I’ll be showing off some of the features in SurvivalWare Simple, which we are officially releasing today.  Another reason to register for today’s webinar at 1:00 p.m. EDT – special discounts on our Concierge QuickStart service available until June 1, 2014.  You have to watch the webinar to get the discount code!

5/21/2014

Here is a link to the recorded webinar.  Depending on your browser, it may download the file first (about 93 MB).  If it does, you can double click on the file after it downloads to view it on your PC.

www.survivalware.com/webinars/2014-05-20_Understanding_your_Cash_Flow_in_less_than_10_Minutes.wmv

 

 

Why does your Cash Flow Suck?

 

Ever wonder why cash seems so tight all the time? Your business is doing well, but it feels like you are riding on the edge when it comes to cash (and cash flow).

Every business owner or entrepreneur goes through it… usually many times along the path to growing a successful company.  Read Philip Campbell’s recent blog entry on what you can do about it.

Why does your Cash Flow Suck?

You need accurate financial statements every month, not once a year

Philip Campbell just posted an excellent article called “Does Your CPA Have to Fix Your Financial Statements for You?”  He points out that corrections are made because transactions have been left out or recorded improperly.  This is generally done once a year. In the meantime you are managing your business based on bad information.  He says the wise thing to do is create accurate information every month.

Check out the full article.  Bravo Philip!

The Power of Transparency and the Value of Information

On a plane trip back home from Omaha a couple of years ago, I read an article in the Wall Street Journal called “The Summer to Go on a Power Diet” discussing products and techniques for reducing power usage.  In the body of the article, they talk about the impact of  just making cost information available:

A study by the Envirnmental Change Institute at the University of Oxford showed a 5% to 15% reduction in power consumption just by providing energy information to users.

( Article link: http://online.wsj.com/article/SB10001424052748704009804575308791120750332.html)

Kevin Cushing, former CEO of AlphaGraphics,  talks about a similar benefit from sharing financial information with employees.
In a recent video testimonial, he explains:

And something I think that’s understated in SurvivalWare, and in sharing financial information as a whole, is how can you keep your employees informed about the financial health of your business?  A lot of small business owners think that their employees don’t know, or don’t care, or it’s way over their head.  Other ones want to hold it all in, because they feel like that’s private information for them and they shouldn’t be sharing that with their franchisees.  My perspective: the more your employees know about the health of your business, the more that they can do to improve the performance of the business.

 

It reminded me of my early days as an industrial engineering student when I learned about the Hawthorne Effect.  Look it up on Wikipedia if you want the details – but in a nutshell some industrial engineers were trying to improve productivity at this huge GE Plant in the early 1900’s, and kept meticulous production records to help them study the impact of certain things.  They turned up the lights – and sure enough productivity increased.  They turned the lights back down – and guess what – productivity increased again!  They concluded it was the attention from management, knowing what was being watched, that led to the improved performance.
My advice is to shine the spotlight on those metrics and measures that are most important to your business, and share the information with employees so they know how they can best improve the performance of the business.  And I guess now I’ll have to practice what I preach!

SurvivalWare is a tool that can help you do this.   You can check it out by downloading the free trial: http://www.survivalware.com/free_download.html

DCF Analysis applied to everyday decisions

Often you are faced with decisions about whether to pay a certain sum up front, or 6 or 12 easy installments – for Auto Insurance, Website hosting, and a myriad of other services.  Often you make the decision based on how “flush” you feel with cash.  When you are a boot-strapping entrepreneur, that means you almost always take the easy monthly payments.  But what is it really costing you?  Should you make the effort to pay up front – perhaps borrowing from a credit card or tapping a line of credit?

Of course, the answer is, “It Depends.”

Discounted Cash Flow (DCF) Analysis

DCF Analysis is a technique that allows you to compute the implied Annual Percentage Rate (APR) of taking the easy payment plan vs. up front lump sum.  With DCF Analysis, you apply a discount factor to future cash flows to bring them back to the present so that you can compare them to an amount of money today.   Take a simple example of a credit card with an monthly interest rate of 1.5%.  If you owe $1,000 today, you can pay it off for $1,000.  Or let it ride, and pay $1,015 in a month.  DCF analysis is a way of saying that the $1,000 today is the same as $1,015 one month from now – assuming a monthly discount (interest) rate of 1.5%.  

The formula for discounting a future payment back to the present is simple:

Present Value = Future Payment * 1 / (1 + i) ^N  where “i” is the interest rate per period, “^” means “raised to the power of”, and “N” is the number of time periods in the future that the Future Payment occurs.

Internal Rate of Return (IRR)

Then Internal Rate of Return is that discount rate that which causes the future “easy payments” to be equivalent to the lump sum payment today.  When you model the payment alternatives as a stream of cash flows, the IRR is that rate at which the Discounted Cash Flow is zero.

Practical Example of DCF/IRR Analysis

I recently joined an entrepereneur peer group and will use their membership fee structure to illustrate.  You can either pay $895 up front for annual membership, or $95 per month for 12 months – at the beginning of each month.

Here are the two alternatives:

Pay $895 today

Pay $95 today, and then $95 at one month intervals for the next 11 months

So think of the second alternative as the equivalent of borrowing $800 (the reduction in what you have to pay today: $895 less $95), and paying it back over 11 months.  You can state that as a stream of cash flows in Excel:

You get $800 today (cash inflow),  resulting in negative $95 per month (cash outflow) for the next 11 months.  You can use the IRR function built into Excel to determine the monthly discount rate that would cause the discounted cash flow stream to equal zero, and then multiply by 12 to get an annual rate.

C4=IRR(C2:N2)

C5=C4*12

 

 

 

 

So in this case, making the 12 easy payments is the equivalent of borrowing at an annual percentage rate of 56.88%.

Why would you ever do such a thing?  There are at least two or three reasons:

1. There may be some uncertainty about using the service for a full year, so you want to contain your risk by committing to just a month at a time.

2. You could be close to tapping out your credit cards and / or lines of credit, and you don’t want to use up any spare credit capacity.

3. Your cost of capital is above 56.88%, and this is a cheaper form of borrowing.