Eye Piece – Can you See Beyond Numbers with Duct Tape?



If you thought the title was a bit confusing let me enlighten you.

The answer is Yes.  See Beyond Numbers is the title of John Jantsch’s latest podcast episode on the Duct Tape Marketing Podcast.

This is one of my favourite podcasts and I recommend it highly.

In the podcast John interview’s Greg Cabtree the author of Simple Numbers, Straight Talk, Big Profits: 4 Keys to Unlock Your Business Potential.

I recently wrote a post entitled “Why Don’t Profits Equal Cash?” and Greg’s message is on exactly this theme.  He has spent many years helping small business owners overcome number blindness to enable them to manage their business using the numbers that count!

You can access the podcast episode here.  I would strongly recommend any business owner spending the 20 minutes to listen to the interview and I would then challenge any of you NOT to buy the book.  I did and have it now on my Kindle Reader on my iPad.

If you go to Greg’s site Seeing Beyond Numbers you can download some tools for improving labour, cost and profit and the book teaches you how to use these.  Greg is also adamant that business owners should be focusing on understanding and managing cash flow not profits and tax minimisation.  A man after my own heart!

So, my recommendations – go to Duct Tape Marketing and subscribe to John Jantsch’s list for his emails.  Find him in iTunes and subscribe to the free podcast there.  Then listen to the episode which you can also directly access here.   Then go to Amazon and buy Greg’s book.  It will be the best money you spend on your business this month, if not this year!  –  click on this link. Simple Numbers, Straight Talk, Big Profits: 4 Keys to Unlock Your Business Potential

Definitley share this with your business friends!



Why don’t Profits equal Cash?


One of the first things Accountants learn is that Profit is not Cash.  I am not an Accountant and neither are most small business owners and this is an easy mistake to make.

For that reason I thought it might be helpful to do a post explaining the difference and how you can get from one to the other.

Always watch the Cash.  You can run out of cash by over trading as well as under trading and remember, Cash is King!

Without going into the detail of how and why accountants organise Profit and Loss Accounts, it is important to watch the Cash and not the Profits.  The whys and wherefores of all this is discussed below.

Any business has a financial floor below which it cannot fall without becoming insolvent.  In essence it runs out of cash.  If you make losses you can eventually run out of cash and the business will fail.  What is not often appreciated, but is just as dangerous, is that you can trade too well and still run out of cash.  I will try to explain how that happens.


The six factors relating to Revenues are set out below.  At another time I will expand on each of these in more detail.

  • Sales Units
  • Cost of Sales
  • Prices
  • Utilisation
  • Seasonality
  • Gross Margin

You need to have a detailed understanding of the key factors that drive your revenues and therefore be able to detect when they are rising or falling on a day to day, week to week and month to month basis.  Once you can distill these factors into Key Indicators you need only watch these to understand how your sales are going.

Operational Costs – SG&A

The Operational Costs of a business or SG&A in US accounting parlance are all the costs which you need to run your business and deliver your products and services.  These critically split between fixed and variable and you need to understand these and the difference between them.

It is worth watching your costs very carefully and understanding them opens the opportunities to make savings or to do things in a smarter way.  I have set out the factors at the end of this section.  Beware that from a cash perspective there will be timing differences month to month for things such as rent or bonuses and understanding the patterns of these cash flows is critical.

  • Fixed
  • Variable
  • Outsourcing
  • Software as a Service
  • Cost Management
  • Seasonality

Fixed Assets

Now lets look at the balance sheet and start with fixed assets.  These are the assets which you purchase as part of your capital expenditure programme but can also include goodwill (arising from acquisitions) or capitalised assets (for R&D expenditure).  These are depreciated or amortised through your Profit and Loss Account (but this is a NON cash item) – it just spreads a notional decline/expensing of these assets through the Profit and Loss Account over time.  This reduces Profits (and tax) and is a very good example of why Profits do not equal Cash.

  • Purchases
  • Sales
  • Depreciation
  • Profit and Loss on Sales
  • Financing
  • Lease or Rent?

Working Capital

The Working Capital of the company is reflected in the Debtors and Creditors in the Balance sheet.

This is the money the company needs to keep it running.  Think about it like the oil in the engine rather than the petrol.

On a month to month basis, because debtors and creditors represent the balance at the end of the period, what we are interested in is the change from the previous month.  This change represents either a “source” of cash or a “use” of cash and this distinction is critical.

Debtors – if your debtors increase, people owe you more money i.e. this money is in their bank account and not yours.  Therefore an increase in debtors is a “use” of cash.

If your Debtors decrease, bills have been paid – Hurrah!  This means money has come into your account and is a “source” of cash.

Creditors – This works the other way round. An increase in Creditors means you owe someone money but have not yet paid it.  The money is in your account.  Therefore an increase in Creditors is a “source” of cash.  If your Creditors decrease, bills have been paid, a “use of cash”

The changes or delta in working capital are a critical part of understanding cash flow and whether your cash is increasing or decreasing and why.  As an example, to explain overtrading, if you sell 1000 units of product at £100 a unit, you raise an invoice for £100,000.  The invoice may be raised at the end of the month and not be paid for six weeks to two months after that creating a debtor and increasing debtors.  This is a use of cash.  However, you have to buy in parts for this and pay for them within 30 days settling bills and reducing creditors – another use of cash.  You have to fund the costs until the invoices for the product is paid for – the timing difference between paying for the parts and being paid for the product.  This is working capital.

  • Debtors
  • Short Term Creditors
  • Long Term Creditor
  • Tax
  • Sources and Uses of Cash
  • Managing Peaks and Troughs


Time in all this is another critical factor.  You need to watch your cash daily but anticipate its movements and your possible need for cash going forward.  A monthly cash flow forecast allows you to do this and to anticipate sources and uses of cash over the year.

While some events are entirely predictable, some are not and you need contingency funds.  Equally if you get a big order, what will this do to your cash flow – it will almost certainly flatter your Profits – such a deceptive Mistress!

Understanding how changes over time affect your cash flow helps you to understand the operational gearing in your business.  How a change of X in Revenues will impact, not only profits, but also your cash flow.

Remember when constructing a cash flow model. Two things are critical.  The model must not be circular and the balance sheet must always balance.

  • Monthly and Annual
  • Predictable Peaks and Troughs
  • Unpredictable Events
  • Contingency
  • Operational Gearing
  • Integrating P&L, CF and BS

Key Drivers

Now we come to the real value in this process.  If you can develop a financial understanding of your business, such that you know its characteristics you can use key indicators to measure and manage. You need to have some clear “drivers” of Revenues and your Operational Costs.  You need to understand the impact of investments in fixed assets, particularly if you are using lease financing which will not appear in your Profit and Loss Account but will have a significant bearing on cash.

A clear understanding of the Working Capital Cycle and “Sources” and “Uses” of cash will help you to understand the state of your bank account, even when sales are going through the roof.   All this brings you down to understanding your bank balance at the start of the month, your bank balance at the end of month and why it has changed.  It will also, crucially, give you a chance of anticipating what is going to happen in the following months so that you can manage your Cash Flow Cycle.

A final word, if you look at your cash flow over 12 or 24 months on a graph it should look like a wavy line.  The average of that line will give you some information.  If the troughs of the waves are below your financial facilities, you are under capitalised and staying in business will be much harder.  You can now work out how much additional “working capital” your business needs to trade and set about working out how you will either generate this cash or seek additional external funds from Banks or Investors.

  • Revenue Drivers
  • Operational Cost Drivers
  • Investment Cycle
  • Working Capital Cycle
  • The Cash Flow Cycle
  • Managing the Cash Flow Cycle

A final word…Please download my Free iBook with my Compliments!

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So, What CAN you DO about Cash Flow?


Further to my recent post about cash flow, my client asked me what their company could do if they thought there was a risk of over trading and have a cash flow problem?

Just to recap, the problem of fast growth is that you need to produce more goods or deliver more services and the timing between paying your suppliers and creditors and your receipt of funds from your clients creates a funding gap and a cash shortage.

Using the Six Minute Strategist methodology, let’s look at this under six headings


As assets build up they suck in cash. So to mitigate the problem you need to reduce the build up of assets.  How can you do this?  One solution is simply to sell less but this could do long term damage to your business. It is better to try to negotiate better terms with your customers. This might include asking for some payments in advance or agree shorter payment terms, 14 days rather than 30 perhaps.  Faster payments leads to better cash flow.


If you are paying any of your suppliers in advance or quickly, arrange to extend your credit terms perhaps to 60 days from thirty or stage your payments to them.  In any event, where you can you should avoid paying in advance for any services.

Prepayments is a slight anomaly as a prepayment is a source of cash, a customer has paid you in advance for goods and services to be provided in the future.  However under UK accounting rules as you don’t actually own the money until you fulfil your side of the contract and so it is accounted for as a liability.

Clearly while you need to pay your taxes on time, including Corporation Tax, VAT and PAYE, if you are in difficulties you can discuss this with the taxman (at least in the UK) and try to negotiate for some more time.   For other liabilities, you can negotiate with your landlord or electricity company for example to extend the timetable of the payments you owe them.

The clear message here is that TIME above all is your enemy.


If the first two steps do not solve your problem, you should consider how you might get additional funding into your business.  This might involve a discussion with your bank manager to get an overdraft or a short term loan.  If your problem is caused by a large order you might be able to turn to factoring or invoice discounting.  In essence, the bank or a finance house pays you the value (with a small discount) of your outstanding invoice and collects the cash themselves a little later.

If the Bank cannot solve the problem, your business may need some additional capital in the form of debt, a convertible or equity from either existing shareholders or third party investors.  The former can be faster but raising capital from new investors can take between three and six months.

One of your last resort solutions is to try to use your credit cards to provide some liquidity.  This is expensive and a very short term solution and not one I would recommend.

Ratios – Watching the Trend

In my first blog post, How do you Account for Cash?  I explained the three ratios which help to keep a close eye on the health of your working capital. The Current Ratio, The Quick Ratio and the Cash Flow Ratio.  You can go back to the original post and see the definitions there.

The important point about these ratios is not the snap shot you get on the day you calculate them but in their trends over time.  Set up your accounting system to capture this information daily and enable you to graph it or capture the ratios in your own spreadsheet and watch them over time.  You can go back to the underlying data to see why the trend is positive or negative and what parts of your working capital are having the most impact once you understand what you are looking for.

Remember the story of the frog in the boiling water, if the water is brought to the boil slowly, the frog doesn’t notice the heat going up!

Debtor and Creditor Days

This is a measure of how quickly you collect your debts and how quickly you pay your creditors and is another easy ratio calculation you can do to help you monitor your working capital.

Debtor Days – divide your trade debtors by Sales and multiply by 365.  You can also take your debtor days at two different dates, take the average of them and divide by sales and then multiply by 365.

To calculate Creditor Days – take your annual purchases or cost of goods sold (a proxy only) and use this denominator.  Divide Creditors by this and multiply by 365.

Clearly you want to be collecting your debtors faster and paying your creditors more slowly.

Be proactive – Watch the cash

The key point to remember is to manage your working capital proactively and anticipate the possibility of problems arising.  The best way to do this is to prepare and manage your own Cash Flow Forecast.  Remember that this will require a financial mode, which includes the profit and loss account, the balance sheet and cash flow.  This model must be integrated between the three and must not be circular.  Once set up you can model different scenarios and ask “What if?” questions.

If you think you are about to win a huge contract and this will put your working capital under pressure, take the initiative and take control of the situation.  Early conversations with your bank manager or shareholders to discuss how this can be funded can help prevent the problem turning into a crisis.

With customers you can try to improve the payment and delivery terms in the negotiations while you are closing the deal, but be careful not to put your customer off.

My last point here is to involve all your Staff.  Keep them appraised of the performance of the company and encourage and reward them for coming up with ways to improve business performance, profitability and cash flow.  They are in an excellent place to save money and to identify areas where further savings and efficiencies can be made.

If you like this please RT.  If you would like to receive more from me, The Six Minute Strategist, please subscribe and join my mailing list.  You can comment below or email me at john[at]jbdcolley[dot]com.  Please also go over to iTunes and you can subscribe to the “Conversation with the Six Minute Strategist“.  Thanks for joining the Conversation!


How Do you Account for Cash?

I have been doing some advisory work for a client and the subject got on to the importance of cash flow.  This is such a critical topic for small businesses that I thought it was worth publishing a Six Minute Strategist post about it

What is Cash flow?  Profits measure the performance of a business over a period of time but in order to show a true picture, accounting rules and conventions use accrual accounting to smooth out timing differences.  The result is normally that profits measured at any point in time rarely equal cash.  Cash flow is therefore the actual cash generated by a business on a day to day basis.

How do you calculate Cash Flow?

Lets concentrate for the moment on Cash Flow from Operations. (We can get on to Financing and Investment Cash Flows in due course).  Operational Cash Flow is the cash generated by the business.

The first part is the positive side of the equation – the cash generated from customers.  Essentially this is sales.  However, the recording of a sale and the receipt of the cash for that sale can be weeks or months apart.  The debtors or receivables account records the sale until it is paid off by the client settling his invoice.  In cash flow terms, this is a USE of cash – i.e. your cash is tied up until the customer sends you the money.  When measuring cash flow, it is important to look at the increase in the asset side of the working capital account and make sure that this is fundable.

On the other side of the account, the creditors or payables side, you record the accounts to whom you owe money.  This can include payments to your suppliers, tax and social security, heating, rents and rates.  If this account increases – i.e. you do not pay your suppliers, they are funding your business and it is a SOURCE of cash.

These movements in working capital are the key measures against which you can calculate the actual cash generated by your business, week to week and month to month.

Another area to watch carefully is the Non-Cash Adjustments to your profit figure – predominantly depreciation and amortisation.  These are long term adjustments to balance sheet assets reflecting the gradual use of these assets over time.  They do not involve any cash going out of the business.  That happened when you acquired the asset.  Operating cash flow is therefore adjusted for any not cash elements before calculating the changes in working capital.

Investment Cash Flows are the capital and operational expenditures into your business.  These items are reflected in the balance sheet and not the profit and loss account unless your accounting policies specifically enable you to write these off as incurred.  Be mindful of the tax implications too (beyond the scope of this post and my expertise too!)

Financing Cash Flows are monies received by the business to further enable it to fund itself.  These can be in the form of  wide variety of financial instruments; debt, equity, convertibles etc.  The negative side of these entries are the repayments made by the company to these investors and funders and include dividends.

How can you measure Liquidity?

If cash flow is the life blood of a business, liquidity is a measure of its fitness – its ability to respond to adverse events.  There are three ratios which we can look at – the Current Ratio, the Quick Ratio and the Operating Cash Flow Ratio.  These are simple to use and you can use them in your business by simply opening your report and accounts.

The Current Ratio is a measure of the relationship between current assets and liabilities.  In short, do you have enough assets (people owing you money) to repay your liabilities (people to whom you owe money).  The slight catch here is that if you had to try to liquidate your receivables quickly would you be able to get full value for them.

The Quick Ratio deducts inventories and prepayments from current assets and then divides the remainder by current liabilities.  This recognises that some of these assets are not readily fungible (not easy to turn into cash at short notice).

The Operating Cash Flow ratio divides the operating cash flow from the business by the current liabilities and recognises the ability of the business to settle its creditors and other monies owing from operational cash flow and does not involve the sale of any current assets.

Why is this important?

One of the greatest risks faced by growing companies is something called “Over Trading”.  This happens when the company grows too fast.  The debtors/current assets of the business expand too fast and the company is unable to fund the timing gap between selling a product or service and recovering the cash for this from its clients.  At times like this, companies may need financial investment or loans from their banks and if this has not been anticipated in advance it can lead to substantial dilution for equity holders or in the worst case, the failure of the business in its entirety.

If you like this please RT.  If you would like to receive more from me, The Six Minute Strategist, please subscribe and join my mailing list.  You can comment below or email me at john[at]jbdcolley[dot]com.