How your CFO can double cash

Businesses often under invest on the accounting side, seeing it as pure overhead meant to be kept to a minimum. And given a marginal dollar, most business owners will opt to either spend it on acquiring more resources or making more sales.

In fact, I've seen the best investment a company can make is bolstering the numbers side of the business. Hiring just one additional accounting clerk or a part-time CFO can double profitability and cash within 12 months. So how can they help the most immediately? Here are three ways:

Regular pruning is critical to the growth of plants; the same for your business. The key is knowing where to prune and how deep. And during turbulent times, it's often advisable to prune deeper. But you need the hard data to help direct the shears.

Have your accounting team give you a spreadsheet that shows gross margin dollar contribution (or just revenue) by products/services listed in descending order. Then walk down the list and draw a line when you reach 85 per cent of your total revenue or gross margin dollars. Seriously consider eliminating the rest, taking the energy and focus you've placed on these underperforming activities and redirecting it to your top producers.

This same exercise should be repeated with customers, raising prices on your least loyal to either make them more valuable or drive them to your competitors. Obviously, this needs to be handled delicately and an evaluation of future lifetime value needs to figure into the decisions. Your accounting department can be helpful in providing this additional analysis.

Continue the exercise by location, opportunities, distribution channels, etc. What's critical is that someone is handing you a piece of paper (best if it's graphical) that is keeping you updated on the profitability/margin contribution by product, customer, office, channel, and/or sales person each week. Then you and your business unit leaders will have the data needed to make critical resource allocation decisions.

If you've ever come up short of cash, as I have, you never want to be in that place again. That's why I've received a cash report each day for almost a decade. CEOs tend to focus more on the profit and loss statement and ignore their cash flow and balance sheet reports at their peril.

To alleviate this weakness, the daily cash report summarises the cash on hand in various bank accounts, details what has come in and gone out in the last 24 hours, and projects what's expected to come in and out as far out as we have data.

Have your CFO download a copy of Dr Neil Churchill's famous Harvard Business Review article How Fast Can Your Company Afford to Grow?

In the article is a formula for calculating your cash conversion cycle, which is the length of time it takes from when you spend a dollar (rent, payroll, marketing, R&D, etc) to when it makes its way back into your pocket. This is key performance indicator (KPI) every business owner should know and monitor.

From this you can determine how fast you can grow on your own internally generated cash. Now that many traditional funding sources have dried up, companies that can generate their own cash to fuel growth will have a huge edge over those that have to spend precious time and resources raising more.

- The writer is author of Mastering the Rockefeller Habits, founder and CEO of Gazelles Inc, an outsourced corporate university with a faculty of top business experts. It is represented in the Middle East by Dubai-based biz-ability.