Improving your CEO Skills means looking at all the angles. It could be from a cashflow point of view to other skills and competencies.
Always had a coaching aspect to their business. For business owners, there is a huge need for business owners to understand their financial statements.
Terry has been coaching for 2 ½ years.
He Owns 3 repair shops – a lot of companies coach you how to run a shop.
Others will teach how to run a dental office.
But that doesn’t teach creating financial statements, reading financial statements.
There are 3 main aims:
People need to have correct financial statements and then understand them.
They Teach 8-10 financial ratios.
Create a debt schedule and understand how a bank would view your business.
These may not reduce the value of your company so much as make the company unsellable. If you’re counting on this.
Primarily income statement and balance sheets.
Current ratio – current assets divided by current liabilities. You want that around a 2.
Accounts receivable days – how long it takes you to get paid.
The accounts payable days – how long it takes you to pay suppliers.
Inventory days – how many days do it take you to flip your inventory?
It’s NOT about sales and net income. It’s about gross margin and cash flow.
If your sales are going up but your gross margin is going down, you are absorbing expenses.
Cashflow margin – is it staying consistent or going up or down?
Again, if your gross margin is going up but this isn’t, you are adding a lot of overhead.
The traditional accounting compares sales and net income from one period in one year to a comparable period in the previous year, eg. Jan 2020 cf. last Jan 2019. This is not useful in Terry’s eyes.
You need to look at the monthly trend.
If you have a cash shortage, you may need a line of credit etc. to fund that.
So, 27 AR, 12 AP – had 15 days to fund before received cash.
With $100K a day in sales, 15 days = $1.5 Million is needed.
If you doubled the sales, you’d need $3 Million to fund that.
This is the cash you need to fund the day to day activities of your company.
If your AR days are 30 and that’s $0.5M, you’ll have bills in that time period, how much money do you need to cover that gap?
The amount of cash you need in your company is a CRITICAL number so you NEVER run out of cash.
You can be profitable and go out of business if you don’t understand the working capital needs of the business.
Growth requires a lot more working capital!
Growing too fast can actually make a bank judge a company negatively.
A friend of Terry’s has a blue-collar company – he didn’t understand the financial statements!
You’ve got to get the financial statements.
Your debt schedule depends on:
This gets to the debt service ratio.
Say you take a 20-year loan out on a property.
If you’re 15 years in, you might be able to refinance that loan to get expansion money for your company.
They borrowed $100K for the company but refinanced the debt and LOWERED his payments by $6K a month
Typically banks will lend on 1.25 multiple (ie. net cashflow is 1.25X loan repayments).
Terry prefers to see 1.7X multiple.
This often plays a large part in funding growth or acquisitions.
Some don’t loan on restaurants.
And some banks don’t loan on owner-occupied real estate.
It boils down to collateral and cashflow!
It’s important to ask the bankers what they DO want to see!
If for example, they want to see a current ratio above 1, ask them!
Same with collateral – Terry would say he had $1M worth of trucks but the bank would discount it by $700K. You need to know how the bank will view your collateral.
Terry used to meet with his banker at the start of each year.
He’d layout plans and give them a heads-up on any initiatives for the year.
Banks change lending policies every so often.
They may no longer be lending to your industry any more.
Back in the day, Terry had real estate loans from one Bank, used a second Bank for business loans and a third bank for other purposes.
Aim for “The Switzerland situation” – independent of all aspects.
Terry had one big customer – ran 50 trucks, 10,000 gallons of fuel a week.
He had ONE customer – the customer responsible for 100% of revenue.
That is NOT a place you want to be in!
Are you the hub of your company?
If so, if we remove you from your company, will it no longer function?
You need to continuously pull yourself out of the company.
The acid test: Can you go on vacation for 2 weeks and company survive?
If you are intimately involved, whoever buys the company will need to be.
That means that you may have serious issues trying to sell the company at all.
Companies with recurring revenue ALWAYS sell more than transactional revenue.
If you sell coffee, people drink coffee every morning.
Fuel is similar for farmers.
(A disadvantage of a brokerage company, like Terry’s, is that it’s very transactional, for example).
There are all kinds of subscriptions you can build in.
Eg. HVAC companies – do you have service contracts?
Consider how to build this into your own business.
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