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Hi and welcome to Be The Flagship with our podcast host, Jeff Parsons.

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This is where we tackle the day-to-day talent management challenges you face.

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And now over to our host.

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Take it away, Jeff.

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So again, we have Jeff Smith joining us.

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We're going to continue the journey today and focus on key financial metrics.

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And so Jeff, thank you again for joining us.

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Always a pleasure talking to you, Jeff.

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It's been a journey.

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But you know, today the intent is there may be listeners in operations who hear financial

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terms, right?

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And I can remember earlier on in my career, you know, and when I couldn't even spell P

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and L, right?

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And you know, so you learn what those things are.

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But there are people listening who may, you know, I hear EBITDA as an example, but I have

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no clue what it really is and I don't want to ask any questions because I might appear

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like I don't know what it is, right?

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So you know, people just go along with it and that's how it's a hard way for people to learn

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when you hear these terms and say, well, I don't want to look dumb.

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So I'm not going to ask them what that is or how it's calculated or those types of things.

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And so there are some of those financial metrics out there, but they're really important to

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the success of a business.

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And so what I hope we get out of this discussion is your take on what you feel the key financial

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metrics are and you know, how they're used and why they're important.

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That makes sense?

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Yeah, that makes absolute sense.

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And I'll just throw in there that that's a common issue with really all professions that

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we all have our own language that we speak.

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And the challenge that we have as professionals is to be able to communicate with other non-professionals

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outside of our profession.

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And so it's really important to be able to take your knowledge and put it into a common

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person's terms so that we all understand each other.

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That's right.

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Even an HR person can understand it, right?

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So well, if I can understand it, then you're probably good with class of third graders

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or something.

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We do learn in our career a lot of these terms, but learning the hard way is not necessarily

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the best way.

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And for listeners who are trying to grow the career, these are really important concepts

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to know and to learn and to be able, as you mentioned, it's important for the finance

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people to be able to communicate to laypeople in a way where the laypeople understand.

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It's also important, it's a two-way street.

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It's also important for the laypeople to understand that these are important concepts and to learn

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enough about these concepts so that they can converse with finance professionals as well.

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That is perfect.

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Yeah.

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So the first, I guess the first question I have for you, and I've heard it a lot in my

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career, is the concept of a balanced scorecard.

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So can you talk to the listeners about a balanced scorecard, what it is and how it's used?

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Sure.

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So I'm a firm believer that you can't run the operation only by looking at financial

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results because financial results are a trailing indicator of all the other upstream activities

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that you've embarked on.

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And also that a strictly financial reporting system can lead to imbalance in your operations.

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So in the 1980s, Robert Kaplan and David Norton came up with what they called the balanced

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scorecard.

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And it took on four different perspectives, the financial perspective, the internal business

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process perspective, learning and growth perspective, and the customer's perspective.

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And all of this was centered around what your vision and strategy is.

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And so their basic theory is that if you look at it from four different perspectives, you

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get a more balanced approach to what your operation is doing.

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So for example, you would have your financial perspective, which would include what we're

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talking about today.

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You would have your internal business process, which is talking about how your business operates

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and your efficiencies and your processes to be able to accomplish what your goals are.

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You've got your learning and growth perspective, which is how is your business setting up for

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the future of your operations?

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Where do you want to go?

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It's more strategic in its outlook.

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And then the customer's perspective is how does the customer perceive your business?

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What's their experience with dealing with you?

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And so if you were to look at only one of those four perspectives, you would get out

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of balance.

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If everything was about the customer and nothing was about the employees, you would have an

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imbalanced organization that would make suboptimal decisions.

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And so I strongly suggest that companies use a variety of performance measures and using

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the balanced scorecard to keep those perspectives in line.

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Having half a dozen metrics per perspective would give you a very balanced perspective

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of your business.

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Okay, so what you're saying is the balanced scorecard is a means to collect the data and

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make sure you're taking into account all those areas that have impact on business success,

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not just the financial perspective or internal business processes or customers or that sort

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of thing, but it's a more holistic approach.

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And you would have financial metrics that measure the finances and you'd have metrics

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that measure the internal business processes and customer satisfaction and employee satisfaction

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and those types of things.

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Is that what you're saying?

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Yeah, yeah.

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So you would have voice of the customer or net promoter score, those sort of things that

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are non-financial metrics that would fall into each of those categories.

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And those provide an alternate way of looking at things.

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And the beauty of the balanced scorecard is it provides the framework and the discipline

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to look beyond just the financials.

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Got it.

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Okay, well, that makes sense.

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So the emphasis is not just on financial metrics, but metrics that measure all aspects of the

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business.

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That's correct.

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Yeah.

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Okay.

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So what I'm discussing today is just that financial perspective, but I wanted to emphasize

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that that's not a complete view of the operations.

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So as a finance guy, I can talk at length about the financial perspective, but I wouldn't

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want anybody saying that's the only way to look at a business.

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Got it.

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That makes sense.

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Thanks, Jeff.

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So another mysterious term out there for some at least is the balance sheet.

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And when you hear finance people talk about the balance sheet or refer to it.

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So talk me through the balance sheet and its purpose and what it's capturing and why it's

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important for business.

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Yeah.

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And just to give just a brief overview is there's three main financial statements.

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There's the balance sheet, the income statement, and the cash flow statement.

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Right.

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I view the balance sheet as kind of the mother sheet of all the other financial statements

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because what the balance sheet does is it takes a snapshot of the business.

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It's a picture and a point of time.

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And it's what does your business look like on paper?

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Whereas your income statement is a view of the activities of the business over a period

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of time.

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And the cash flow statement describes what happened to your cash over that same period

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of time.

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So your balance sheet is structured in a way that it balances.

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And that's hence the name.

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So at its highest level, assets equals liabilities plus owner's equity.

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So your assets is what you own.

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Your liabilities is what you owe.

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And your owner's equity is what you have invested in the business.

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And so the three of them have to balance out.

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And if they don't, then you've got a problem.

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So on the asset side of the balance sheet, you have...

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It starts from the most cash oriented, which we at Finance guys talk about liquidity.

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The most liquid is the closest to cash, right?

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So the top thing on your balance sheet on the asset side is cash.

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Then it's accounts receivable, inventories, other current assets.

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And so you've got this group of items that's called current assets, which is those four

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things that I just mentioned, cash accounts receivable, inventories, and other current

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assets.

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Then you've got longer term assets, which we refer to as fixed assets, and then other

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assets.

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A fixed asset would be if I had property, plant, or equipment.

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If I have a building, it's going to last me more than one business cycle.

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And so we call that a fixed asset.

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If I have a machine that's going to last me more than one business cycle, that's also

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a fixed asset.

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Whereas if I have inventory and I'm going to bring it in, I'm going to transform it

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and send it out, that's in current assets because it's going to turn into cash quickly.

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Okay.

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On the liability side of the balance sheet, you have the same thing, is the most liquid

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first, the closest to cash.

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And so you have accounts payable, and then you have short term loans.

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Other accrued liabilities, which would include payroll and benefits payable, or royalties,

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or other types of liabilities that I owe to other companies.

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And then I have the current portion of long-term debt.

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If I've got a term loan that's five years old or five years out, I take the amount that

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I'm going to pay in the next business cycle, the next year, and I reclass it up to current

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liabilities because it's going to turn into cash or use cash in the next business cycle.

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So those items are current liabilities.

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And then I have long-term debt and then other liabilities for a comes out to my total liabilities.

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Okay.

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So I take my total assets minus my total liabilities, that whatever is left over is what I own as

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a business owner, and that's my owner's equity.

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So that's a snapshot, if you will, of the company's success, right?

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Correct.

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Okay.

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Or maybe not their success, but it's a snapshot.

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It's a snapshot of the company's financial health.

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Yeah.

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Yeah.

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It's a picture in a point of time.

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It's a snapshot at a given time.

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And so often at the end of a period, December 31st would be when you take the measure of

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the balance sheet or the end of a quarter or the end of a month, you would take the

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snapshot of the balance sheet.

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Got it.

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Okay.

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And so that's the balance sheet.

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You mentioned that there were three, the balance sheet, the income statement, and the statement

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of cash flow.

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So talk to me about the income statement.

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Okay.

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So the income statement, if you reflect back to the balance sheet, the owner's equity section,

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the owner's equity section is made up of two things.

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It's your investment in the company and then any earnings that you retain.

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It's called retained earnings.

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Your retained earnings change over time.

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It's the cumulative amount of all your net incomes over time.

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And so the income statement provides that microscope into what happened to your retained

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earnings.

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And so it's made up of revenue or sales at the top and then your cost of sales, otherwise

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known as cost of goods sold.

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And that brings us down to what's called gross profit.

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Then you have your operating expenses, which is research and development, selling and administration,

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and then general, which is accounting and HR and all the supportive functions to come

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down to what's called operating income.

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Operating income is also termed as EBIT, which is earnings before interest in taxes.

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Okay.

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Then you have other income and expense, which is your interest in your taxes to come down

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to net income.

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There's another measure in there that adds back depreciation and amortization expense.

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And that's called EBITDA, earnings before interest, taxes, depreciation, and amortization.

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So you'll hear that term sometimes when people are talking about results.

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Okay.

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Yeah.

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I've heard that term very often.

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Yeah.

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Okay.

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So that's the income statement.

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So how often would you publish the income statement?

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Typically on a monthly basis.

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And so unlike the balance sheet, the balance sheet is a picture in a point of time.

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Yeah.

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The income statement is a description of the activities from one time period to the next.

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I see.

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So your income statement would be a statement, say, for the month, it would be from the first

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of the month to the 31st of the month, all the sales, costs, expenses, et cetera, to

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come down to net income.

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So the balance statement would be a snapshot or a picture at a point in time.

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And the income statement reflects the financial health over a period of time.

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Correct.

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Gotcha.

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All right.

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Okay.

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So that brings us to the infamous cash flow statement.

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Yeah.

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And the cash flow statement is, I think, one of the most underappreciated statements of

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the financial statements because it's hard to understand.

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They use terms that are difficult to understand, but it is very valuable, especially if you

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are running a business where cash is important.

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So the cash flow statement is a description of what happened to your cash over a period

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of time.

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So let's say if you publish your financial statements once a month and your income statement

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is from the first to the 31st, your cash flow statement is for the same time period.

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Okay.

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Mm-hmm.

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And so it starts off with your net income, your net earnings.

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And then they add back any non-cash expenses, which is non-cash expenses would be your depreciation

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and amortization expense.

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And then you adjust for changes in the balance sheet, changes in accounts receivable, changes

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in inventory, and changes in accounts payable, which would bring you down to cash flow from

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operations.

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So there's three categories in the cash flow statement, cash from operations, cash from

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investments, and cash from financing.

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So your cash from operations deals with those things that are normal to the course of the

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business.

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Your cash from investing is if you have to buy fixed assets to run your business, those

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are investing activities.

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And so the change in fixed assets at cost is your cash from investing.

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And then how you pay for those investing activities, your fixed assets, is called cash flow from

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financing, and that's your change in debt.

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So let's say I buy a piece of equipment.

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I'm going to have a payment for $100,000.

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And so my cash flow from investing would be minus $100,000.

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But let's say that I paid $10,000 for it, $10,000 down payment for it, and then I borrowed

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the rest.

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I would have a cash flow from financing of $90,000, right?

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Because I paid $10,000 straight out of it, but I borrowed $90,000.

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Somebody else's money paid for my fixed assets.

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And so I had an inflow of cash based on that loan.

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00:20:58,760 --> 00:21:03,200
So when you add all those together, you've got your cash from operations, you've got

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your cash from investing, cash from financing.

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So that equals your total cash flow.

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And how that relates to your balance sheet is if you take your beginning cash balance

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plus your cash flows equals your ending cash balance.

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Okay.

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So, Jeff, we've talked about the balance sheet, the income statement, and the statement of

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cash flows.

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Let's take a quick break.

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And then when we come back, we'll delve into each of those in more detail.

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At Flagship Talent, we work with our clients to find and place the right talent.

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What do we mean by the right talent?

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00:21:43,900 --> 00:21:48,500
We mean we find talent who will commit to your organizational goals and align with your

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00:21:48,500 --> 00:21:51,220
values and behavior expectations.

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00:21:51,220 --> 00:21:53,760
Talent who will perform to your expectations.

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00:21:53,760 --> 00:21:57,300
Talent who will stay and grow with your organization.

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00:21:57,300 --> 00:21:59,300
How are we different from our competitors?

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We offer the lowest fee structure in the industry.

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00:22:02,120 --> 00:22:04,940
We offer the best talent guarantee in the industry.

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00:22:04,940 --> 00:22:09,780
We provide selection and interviewing support to our clients at no additional fee.

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00:22:09,780 --> 00:22:15,180
We want to save you money, deliver high quality talent, become an extension of your organization,

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00:22:15,180 --> 00:22:18,740
and be your preferred provider of talent acquisition solutions.

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00:22:18,740 --> 00:22:24,500
To learn more, contact Jeff Parsons by email at jeff at flagshiptalent.com or by phone

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at 1-800-530-4189, extension 101.

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Okay.

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We're back with guest speaker, Jeff Smith.

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So Jeff, how do you know where to go to get the financial data you need to resolve an

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issue, to make a decision, that sort of thing?

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How do you know what's good?

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00:22:46,300 --> 00:22:50,220
How do you know where to find the data that you need?

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00:22:50,220 --> 00:22:58,740
Well, so all of the, most of the financial information comes straight from those three

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financial statements.

293
00:23:00,020 --> 00:23:01,020
Okay.

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And so your accounting department is going to have a ERP, an enterprise resource planning

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system.

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And that will include the financials, right?

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And so at the end of every month, the accountants go in their back room, they do all their accounting

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stuff and out popped these three financial statements.

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Gotcha.

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00:23:29,460 --> 00:23:37,100
Now, taken out of context, you don't know whether it's good or bad, right?

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00:23:37,100 --> 00:23:42,980
If somebody said to me, well, Jeff, I have a 30% gross profit.

302
00:23:42,980 --> 00:23:43,980
Is that good?

303
00:23:43,980 --> 00:23:44,980
Mm-hmm.

304
00:23:44,980 --> 00:23:49,620
And the answer is, I don't know, right?

305
00:23:49,620 --> 00:23:58,800
It could be good because if I looked at what you've done in the past and 30% is an improvement

306
00:23:58,800 --> 00:24:03,820
over what you've done in the past, then maybe it's good, right?

307
00:24:03,820 --> 00:24:10,460
If I look at what your budget is and 30% is right at where your budget is, then it could

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00:24:10,460 --> 00:24:11,500
be good.

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00:24:11,500 --> 00:24:17,900
If I look at what your peers are doing out in the industry and they're all making a 50%

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00:24:17,900 --> 00:24:23,460
margin and you've got a 30% margin, then maybe it's not so good, right?

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00:24:23,460 --> 00:24:31,420
So we have to have comparisons in order to understand financial metrics.

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00:24:31,420 --> 00:24:39,260
And so the things that we compare to is actual versus budget, this period versus last period,

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00:24:39,260 --> 00:24:45,820
this period versus the same period of last year, which then allows you to understand

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seasonality.

315
00:24:48,060 --> 00:24:54,340
And then your results versus your competitors' results or your results versus industry best

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00:24:54,340 --> 00:24:55,340
practices.

317
00:24:55,340 --> 00:25:00,780
Those are kind of your comparison points where you're looking at things.

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And so you don't want to compare it to just one thing.

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You'll want to compare to a couple of different things in order to get a good understanding.

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And so understanding where you've come from, understanding where you've projected that

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00:25:16,540 --> 00:25:23,260
you're going to, and understanding what others in the industry are doing are good comparisons

322
00:25:23,260 --> 00:25:28,220
to understand whether it's a good or bad result.

323
00:25:28,220 --> 00:25:30,340
Gotcha.

324
00:25:30,340 --> 00:25:38,220
And I'm certain that those comparisons are really important when you're trying to get

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00:25:38,220 --> 00:25:45,980
additional financing or when you're looking at M&A activity or that sort of thing as well

326
00:25:45,980 --> 00:25:48,820
to improve the financial health of your business.

327
00:25:48,820 --> 00:25:49,820
Yeah.

328
00:25:49,820 --> 00:25:56,940
One thing I would caution as well is not to get too tied to the metric itself.

329
00:25:56,940 --> 00:26:00,980
Learn about the story behind the metric.

330
00:26:00,980 --> 00:26:03,700
And give you an example.

331
00:26:03,700 --> 00:26:04,700
Okay.

332
00:26:04,700 --> 00:26:12,140
When I worked for manufacturing companies, purchase price variance, otherwise known as

333
00:26:12,140 --> 00:26:22,440
PPV, is a big metric for the supply chain people, especially the purchasers.

334
00:26:22,440 --> 00:26:24,380
But they get all stressed out about it.

335
00:26:24,380 --> 00:26:28,580
They're like, oh, I can't show a negative PPV.

336
00:26:28,580 --> 00:26:33,740
And where the result is the result.

337
00:26:33,740 --> 00:26:39,060
So let's say that the price of steel goes up.

338
00:26:39,060 --> 00:26:48,220
And that ends up resulting in a negative purchase price variance because the purchase price

339
00:26:48,220 --> 00:26:55,340
variance compares your actual amount that you paid for a product to the standard cost

340
00:26:55,340 --> 00:27:01,260
of the product, the expected price that you're going to pay.

341
00:27:01,260 --> 00:27:10,140
If your actual is different than your expected, then it's going to have a variance, either

342
00:27:10,140 --> 00:27:12,900
a positive or a negative variance.

343
00:27:12,900 --> 00:27:21,180
And so understanding that the price of steel goes up, that's beyond our control.

344
00:27:21,180 --> 00:27:31,180
So if we have a, say, a product that has a whole bunch of steel in it, then we're going

345
00:27:31,180 --> 00:27:35,100
to have an increase in overall costs.

346
00:27:35,100 --> 00:27:38,700
We're going to have a negative PPV.

347
00:27:38,700 --> 00:27:41,980
It's not that it's good or bad.

348
00:27:41,980 --> 00:27:46,100
It's how do you explain it, right?

349
00:27:46,100 --> 00:27:51,700
We explain that the price of steel has gone up.

350
00:27:51,700 --> 00:27:53,220
It's out of our control.

351
00:27:53,220 --> 00:27:58,660
We're going to have this negative variance for the rest of the year.

352
00:27:58,660 --> 00:28:04,580
So we're going to have to figure out other ways of adjusting for it.

353
00:28:04,580 --> 00:28:05,580
Right.

354
00:28:05,580 --> 00:28:13,380
And I know from experience that sometimes companies make decisions on, as an example,

355
00:28:13,380 --> 00:28:15,580
raw material purchases, right?

356
00:28:15,580 --> 00:28:19,220
And as you mentioned, steel, but it may be okay.

357
00:28:19,220 --> 00:28:26,660
The price of oil is down and so our oil-based raw material prices are lower.

358
00:28:26,660 --> 00:28:30,460
We need to pre-buy and build our inventory.

359
00:28:30,460 --> 00:28:37,500
And I believe that's one of the more frustrating thing for the lower level, entry level operations

360
00:28:37,500 --> 00:28:41,180
leaders because they don't understand, well, this month they want us to build inventory,

361
00:28:41,180 --> 00:28:46,020
next month they want us to sell off inventory.

362
00:28:46,020 --> 00:28:47,500
They can't piece it together.

363
00:28:47,500 --> 00:28:53,700
They think that the people, the senior leaders don't really know what they're doing.

364
00:28:53,700 --> 00:28:58,860
But you make a decision to pre-buy raw materials that you know you're going to need over time

365
00:28:58,860 --> 00:29:03,460
and it will have an impact on your financials, but you have to be able to tell the story

366
00:29:03,460 --> 00:29:09,940
of why, you know, what the impact is, why it's there and what you're doing to remedy

367
00:29:09,940 --> 00:29:10,940
it, right?

368
00:29:10,940 --> 00:29:11,940
Yeah.

369
00:29:11,940 --> 00:29:12,940
Yeah.

370
00:29:12,940 --> 00:29:17,580
And you have to make a balancing decision based on the carrying costs of holding that

371
00:29:17,580 --> 00:29:24,620
inventory versus the benefit of pre-buying at a lower cost.

372
00:29:24,620 --> 00:29:25,620
Right.

373
00:29:25,620 --> 00:29:26,620
That's right.

374
00:29:26,620 --> 00:29:27,620
Okay.

375
00:29:27,620 --> 00:29:31,060
So, good discussion there.

376
00:29:31,060 --> 00:29:39,900
Going back to the balance sheet, you know, what are some of the metrics that are tied

377
00:29:39,900 --> 00:29:42,420
to the balance sheet?

378
00:29:42,420 --> 00:29:47,700
So on the balance sheet, there's two types of metrics.

379
00:29:47,700 --> 00:29:56,460
There's what's called liquidity metrics, which talk about how you're managing your cash versus

380
00:29:56,460 --> 00:30:02,260
that management metrics, which talk about how you're managing your investments.

381
00:30:02,260 --> 00:30:03,260
Okay.

382
00:30:03,260 --> 00:30:11,740
So on the liquidity side, we have the one thing you'll hear often is working capital.

383
00:30:11,740 --> 00:30:14,260
That's right.

384
00:30:14,260 --> 00:30:19,720
Working capital is current assets minus current liabilities.

385
00:30:19,720 --> 00:30:28,060
So if you remember back to the balance sheet, it's cash, accounts receivable, inventories

386
00:30:28,060 --> 00:30:30,220
and other current assets.

387
00:30:30,220 --> 00:30:31,220
Yeah.

388
00:30:31,220 --> 00:30:44,540
Current liabilities is accounts payable, prepaid or accrued liabilities and other liabilities.

389
00:30:44,540 --> 00:30:51,440
So your assets, current assets minus your current liabilities equals your working capital.

390
00:30:51,440 --> 00:30:58,700
Your current ratio is your current assets over your current liabilities divided by,

391
00:30:58,700 --> 00:31:07,100
and that gives you a, instead of a dollar value, it gives you a percentage.

392
00:31:07,100 --> 00:31:12,540
Percentages are easier to compare to other businesses in the industry because they're

393
00:31:12,540 --> 00:31:14,420
all different sizes, right?

394
00:31:14,420 --> 00:31:23,780
So if you would just have dollar amounts, then it's sometimes hard to manage because

395
00:31:23,780 --> 00:31:25,540
it's out of context.

396
00:31:25,540 --> 00:31:26,540
Right.

397
00:31:26,540 --> 00:31:27,540
Okay.

398
00:31:27,540 --> 00:31:30,700
Days sales outstanding.

399
00:31:30,700 --> 00:31:34,700
That's another one that you'll hear a lot of, DSO.

400
00:31:34,700 --> 00:31:37,900
That measures how you're collecting on your revenue.

401
00:31:37,900 --> 00:31:42,780
So I sell product to my customer.

402
00:31:42,780 --> 00:31:47,260
They're not coming in with a suitcase full of cash.

403
00:31:47,260 --> 00:31:55,060
We invoice them, they owe us and typical terms are net 30 days, net 45 days, something like

404
00:31:55,060 --> 00:31:56,060
that.

405
00:31:56,060 --> 00:32:02,300
So we have accounts receivable, those things that people owe us.

406
00:32:02,300 --> 00:32:07,580
And so how long does it take for us to collect on it?

407
00:32:07,580 --> 00:32:13,560
So days sales outstanding is your accounts receivable over your revenue times your number

408
00:32:13,560 --> 00:32:14,760
of days.

409
00:32:14,760 --> 00:32:22,580
So it'd be like, you know, accounts receivable over your sales for the year times 365, which

410
00:32:22,580 --> 00:32:30,060
will give you a number of days that it takes to collect on your receivables.

411
00:32:30,060 --> 00:32:31,060
Okay.

412
00:32:31,060 --> 00:32:42,140
Your day sales in inventory, which every operations person should understand, is similar to that.

413
00:32:42,140 --> 00:32:48,340
It's your inventories over your cost of goods sold times the number of days.

414
00:32:48,340 --> 00:32:53,060
And that's how many days worth of inventory do I have on hand?

415
00:32:53,060 --> 00:32:54,060
Right.

416
00:32:54,060 --> 00:33:01,820
I'll give you the caveat there is that that does not stratify your inventory and every

417
00:33:01,820 --> 00:33:09,980
operations person should have an understanding of what they have in inventory, whether they

418
00:33:09,980 --> 00:33:16,540
have slow moving items in inventory, whether they have obsolete items in inventory.

419
00:33:16,540 --> 00:33:25,140
And so this is just a very high level picture, but it's incumbent on the operations person

420
00:33:25,140 --> 00:33:30,060
to understand the details behind the inventory.

421
00:33:30,060 --> 00:33:31,060
Right.

422
00:33:31,060 --> 00:33:37,940
Days payable outstanding is accounts payable over cost of goods sold times the number of

423
00:33:37,940 --> 00:33:38,940
days.

424
00:33:38,940 --> 00:33:49,020
So that's how long do I take to pay my vendors for the inventory that I bought?

425
00:33:49,020 --> 00:33:57,060
So if we bring all that together into one metric, we have the cash conversion cycle,

426
00:33:57,060 --> 00:34:03,780
which is really, really useful, especially when you're in an expanding business, because

427
00:34:03,780 --> 00:34:10,780
your cash conversion cycle is your day sales outstanding plus your day sales and inventory

428
00:34:10,780 --> 00:34:13,940
minus your day's payable outstanding.

429
00:34:13,940 --> 00:34:22,500
And so that's how much time does it take me to turn my investment in inventory into cash?

430
00:34:22,500 --> 00:34:35,060
So if I buy inventory on day zero and it takes me 30 days to convert it to a saleable asset

431
00:34:35,060 --> 00:34:45,220
and then I sell it and it takes me 45 days to collect, that's 75 days of total inventory

432
00:34:45,220 --> 00:34:47,820
to cash.

433
00:34:47,820 --> 00:34:55,060
And I have accounts payable and say I've negotiated 30 day terms.

434
00:34:55,060 --> 00:35:00,300
Well, I can then take out 30 days out of that 75 days.

435
00:35:00,300 --> 00:35:06,620
So 45 days would be the amount of time it takes me to take to turn an investment in

436
00:35:06,620 --> 00:35:08,780
inventory into cash.

437
00:35:08,780 --> 00:35:20,140
That's really important if we're expanding because say my baseline sales is $1,000 and

438
00:35:20,140 --> 00:35:24,340
I want to increase my sales to $2,000.

439
00:35:24,340 --> 00:35:33,380
Well, if I've got 45 day cash conversion cycle, I need to have at least a month and a half

440
00:35:33,380 --> 00:35:41,140
worth of access to cash in order to fund that increase in sales.

441
00:35:41,140 --> 00:35:42,700
Does that make sense?

442
00:35:42,700 --> 00:35:43,700
It does.

443
00:35:43,700 --> 00:35:44,700
It makes sense.

444
00:35:44,700 --> 00:35:45,700
Yeah.

445
00:35:45,700 --> 00:35:46,700
Yeah.

446
00:35:46,700 --> 00:35:58,980
So before we move away from liquidity, liquidity issues or having low liquidity would be the

447
00:35:58,980 --> 00:36:05,100
problem that pushes a company potentially into let's say bankruptcy, worst case scenario,

448
00:36:05,100 --> 00:36:06,100
correct?

449
00:36:06,100 --> 00:36:07,100
Yes.

450
00:36:07,100 --> 00:36:08,100
Yes.

451
00:36:08,100 --> 00:36:09,100
Yeah.

452
00:36:09,100 --> 00:36:13,420
And the awkward conversation is that you can have a company that's very successful that

453
00:36:13,420 --> 00:36:14,420
goes bankrupt.

454
00:36:14,420 --> 00:36:15,420
Yeah.

455
00:36:15,420 --> 00:36:20,140
Because if you're expanding and they don't have access to cash in order to fund their

456
00:36:20,140 --> 00:36:24,380
expansion, then they're going to get themselves into trouble.

457
00:36:24,380 --> 00:36:25,460
Right.

458
00:36:25,460 --> 00:36:35,420
Or if their cash is, or if it's all tied up and you're not getting your receivables collected

459
00:36:35,420 --> 00:36:40,840
and you're expending cash in payables, more cash than you're bringing in, then you get

460
00:36:40,840 --> 00:36:44,220
yourself into trouble as far as liquidity is concerned.

461
00:36:44,220 --> 00:36:45,220
Correct.

462
00:36:45,220 --> 00:36:46,220
Yeah.

463
00:36:46,220 --> 00:36:47,220
Okay.

464
00:36:47,220 --> 00:36:52,900
That makes sense to me and I've had clients with that issue.

465
00:36:52,900 --> 00:37:00,660
So well, Jeff, I know by my mentioning bankruptcy, we've sort of ended this episode on a down

466
00:37:00,660 --> 00:37:03,340
note, right?

467
00:37:03,340 --> 00:37:08,700
But it had to be said and it was excellent discussion today.

468
00:37:08,700 --> 00:37:10,780
So thank you again, Jeff.

469
00:37:10,780 --> 00:37:18,860
And next week is our final episode of episode eight of Finance and Operations with guest

470
00:37:18,860 --> 00:37:21,420
speaker Jeff Smith.

471
00:37:21,420 --> 00:37:27,460
If you want to get in touch with Jeff Smith, you can do so via email at Jeff, that's G-E-O-F-F

472
00:37:27,460 --> 00:37:34,940
dot Smith at dynamic strategy LLC dot com.

473
00:37:34,940 --> 00:37:36,860
So join us again next week.

474
00:37:36,860 --> 00:37:44,460
I promise you we won't be talking about bankruptcies or funerals or anything so dire and so dark.

475
00:37:44,460 --> 00:37:50,040
We'll have a great discussion next week to wrap up our series on Finance and Operations.

476
00:37:50,040 --> 00:37:56,820
In the meantime, thank you for listening and work hard to be the flagship in your industry.

477
00:37:56,820 --> 00:37:57,820
Thanks again.

478
00:37:57,820 --> 00:37:58,820
See you next week.

479
00:37:58,820 --> 00:37:59,820
Bye.

480
00:37:59,820 --> 00:38:04,300
Thank you for listening to this episode of Be the Flagship with Jeff Parsons.

481
00:38:04,300 --> 00:38:05,520
We hope you enjoyed it.

482
00:38:05,520 --> 00:38:08,620
If you did like it, please subscribe and share with others.

483
00:38:08,620 --> 00:38:21,060
Until next time, take the step to become the flagship in your marketplace.