7 Key Financial Levers

January 8, 2018

How Can I Increase the Cash Flow and Returns for My Business?

Understanding the 7 Key Financial Levers

When growing your business, you might be able to get by with decent people, strategy, and execution in the short term, but you’ll never go anywhere if you run out of cash.

That statement itself isn’t that revelatory. Any business of any size will always need capital in order to succeed. You should focus on improving your cash flow, and we recommend using these 7 financial levers.

  1. Price
  2. Volume
  3. Cost of Goods Sold
  4. Operating Expenses
  5. Accounts Receivable
  6. Inventory / Work in Progress
  7. Accounts Payable

Let’s break down how you can put these levers to work for you.

  1. Price = Increase the price of your goods and services.
  2. Volume = Sell more units at the same (or lower) price.
  3. Cost of Goods Sold = Reduce the price you pay for your raw materials and direct labor.
  4. Operating Expenses = Reduce your overhead.
  5. Accounts Receivable = Collect from your debtors faster.
  6. Inventory / Work in Progress = Reduce the amount of stock you have on hand.
  7. Accounts Payable = Slow down the payment of creditors.

Not all of these levers will work for your business all the time, so it’s crucial you use the ones that organically make the most sense. Figuring out which ones offer the best return on your investment will require some trial-and-error, so it’s important you track your efforts. You can then use that data to determine whether you need to keep using the same levers in the same way, use them in new ways, or use different levers altogether.

Employing the “Power of One”

Alan Miltz and his team at Cash Flow Story have developed a helpful, yet inexpensive online tool called the “Power of One.” This bit of software can do the powerful calculations that show your team how to improve the operating cash flow for your business.

It all begins by understanding the 1% or 1-day changes in your 7 key drivers. For example, you can choose to focus on:

  • The effect a 1% increase in Price will have compared to a 1% increase in Volume.
  • The effect of a 1% reduction in your COGS and Overhead.
  • The impact on your Cash Flow of a 1-day decrease in Receivables or Inventory compared to a 1-day increase in Payables.

It’s crucial your Marketing, Operations, and Finance people all understand how the Power of One can directly influence which of the 7 levers your business decides to use. The Power of One also shows you the sensitivity of each key driver to Cash Flow and Profit. 

If you want to test drive the Power of One to see how the software can impact the cash flow for your business, contact me today. 

For additional insights into the research and case studies about cash flow that have been published by writers like Verne Harnish, please schedule a free consultation.