Step 1: Create a one-page monthly financial scorecard.

• One-page financial record that contains 4 chapters.
  • Chapter 1: Profitability – your profit.
     
  • Chapter 2: Working Capital – equals = (Receivables + Inventory or Work in Progress) – Payables 
     
  • Chapter 3: Other Capital – your Balance Sheet.
    • Funding (Net Debt + Equity) = Net Operating Assets (Working Capital + Other Capital).
  • Chapter 4: Funding and Returns – your funding as measured by your cash flow.
    • The quick way to calculate Chapter 4 is the movement in all your bank accounts – that’s the reconciliation of cash.
  • Further examples here.
     

Step 2: Calculate and include your marginal cash flow on your financial scorecard.

• Marginal cashflow calculation: Gross Margin % – Working Capital %
  • Formula = (Gross Margin / Revenue) – [Working Capital (Debtors + Inventory / WIP + Creditors)/Revenue]
     

Step 3: Create visibility in your company.

• Create your Ideal profile/target for each measure in your Profitability and Working Capital.
  • Colour code your business for each of the measures Good (Green) / Average (Yellow) / Bad (Red) for each of the business ratios.

Step 4: The financial health review process.

• Review your one page scorecard and the colors (green, orange, red) that you are getting each month.
  • Look at your trends in Working Capital
    • Working Capital Timeline (Creditor Days, Stock Days, Debtor Days)
  • Profitability trends (Gross Margin %, EBIT %, Net Profit %)
    • Revenue Growth vs. Overheads Growth

Step 5: Define actions based on 7 levers to improve business.

• On a quarterly basis discuss with your management what changes can be made to move the 7 levers to improve profit, cash flow and business value:
  1. Price increase %
  2. Volume increase %
  3. COGS reduction %
  4. Overheads reduction %
  5. Reduction in Debtors Days
  6. Inventory / WIP – reduction in Stock Days
  7. Increase in Creditors Days

Step 6: Rinse and repeat – review results and define new actions.