Any business owner will tell you that at one point or another they have had an issue with cash flow, and for many business owners, this is a common ongoing problem. The problem can seem insurmountable if your business is not generating revenue. So how can you get your arms around all of it to stop the bleeding and make the necessary changes to get cash flowing again? Mr. Darrell Dorrell is a widely recognized CPA and the principal at Financial Forensics. His work in the area of forensic accounting has resulted in proven systems for cash flow management and daily revenue projections and tracking that you can benefit from immediately, starting today. This is can't-miss “Deal Talk.”
Let's say you're in your automobile and you have a GPS unit. You know where you are now probably, but the rolling cash flow tells you where you've come from.
- Darrell Dorrell
Jeff: Darrell, it is an epidemic out there. We know that there are a lot of small business owners constantly having problems with cash flow, and it doesn't matter how good the economy is. Sometimes it doesn't even matter how good business might be for some businesses out there; cash flow is always a problem. You wrote that book “Financial Forensics Body of Knowledge.” You go out and you help clients address these concerns. How big an issue is it out there for business owners today in fighting these problems that they're having with cash flow and revenue in their businesses?
Darrell: It's surprisingly large, Jeff. It's almost irrelevant regarding the size of the company. We've encountered tiny companies with cash flow problems and also giant companies, and I mean giant companies. So it's something that's common across all sizes, types of business and all types of industries. In fact, it's one of the first things we question regardless of the assignment we're working on. It's pretty obvious in a troubled company that cash certainly needs some focus on it. But even in companies doing very well, particularly entrepreneurial driven, the owner, CEO typically keeps an eye on the checkbook balance, which really is like driving in the dark without headlights. And so once we learn that and understand that, there's a tool called RCF, rolling cash flow, that we put in dozens and dozens of companies, in fact, several nonprofits and public sector organizations, so that not only do you know where cash is, but most importantly where it will be in the near future.
Jeff: This is fantastic because, Darrell, you called my attention to a presentation that you began giving quite some time ago. It's very, very relevant. It doesn't matter what time of year, it doesn’t really matter what the economic climate is. “Financial Triage for Troubled Times,” and I have the PDF right in front of me, and I'm looking at this as we speak where you talk about rolling cash flow. You also talk about the daily revenue chart. We're going to get into both of those today starting with the rolling cash flow, and then we'll look at the daily revenue chart in the second half of this program. I want our listeners to consider this as a kind of workshop. If you're not taking notes, if you don't have a pen and a sheet of paper handy, you need to do that, you need to get one right now. And keep in mind, you can always come back and listen to this program again. But what I'd like to do right now is I'm going to give this over to you. I'd like to start by talking about rolling cash flow and your potential solutions for those folks out there having trouble managing cash flow right now. Let's go ahead and let's just get into it right off the bat, off the start.
Darrell: Starting with the rolling cash flow, by saying it's one piece of paper, and that's very important. It's just one piece of paper. It happens to be built in Excel, and it's difficult to visualize without seeing it. But conceptually it says that as you're looking at this one piece of paper you see where cash has come in and gone out for the last three preceding weeks, for a week in total. You're looking at this week, say we start on a Monday morning, so you're seeing where it's come for three preceding weeks, and where it is today, assuming this is Monday. And then based on expected receipts and disbursements through Tuesday, Wednesday, Thursday and Friday where it will be at the end of the week, and then three further weeks after that. And granted, no one can predict the future, but if you don't have a forward-looking element to the cash, it's like driving on an old country road at night without headlights. You can be in serious trouble. And I'll tell you too, Jeff, as I said, we will put these two tools, the rolling cash flow and the daily revenue chart, in Excel format on your website, so if people are interested, they can access it. And if they have any trouble, we routinely provide an hour for each just as a courtesy to help companies implement it. It doesn't take much more than that at all.
The rolling cash flow concept, it came about, about 25 or so years ago. In those days, we were assisting a movie company that had about 26 screens, as I recall, within a two-seat area. And the CEO contacted me and said, “We can't meet payroll. We don't have enough cash." At the time, that was kind of certainly before Internet and before significant credit card usage. At the time they relied heavily on cash for the admission to the theater, for condiments, refreshments and so forth. Consequently, they had to have the nearest local branch to each screen. And so they would deposit cash into the bank and eventually get the cash to headquarters. He was calling me with troubles about cash flow, and I knew that there was at least one bank for each movie theater. So we did the first step in cash called CAD. It's concentrate, accelerate and decelerate. On the concentration side we found in all those bank accounts $900,000 that he didn't even know he had. And so consequently we put a procedure in with this rolling cash flow to enable him to solve his problem and have a continual forward look.
Starting with the rolling cash flow, by saying it's one piece of paper, and that's very important. It's just one piece of paper. It happens to be built in Excel, and it's difficult to visualize without seeing it.
Jeff: Wow, let me ask you something real quick, he didn't even know he had it but it was there, it was on record. How common is that, Darrell, just in brief? How common is that for a business owner to not see that money in their account?
Darrell: Shockingly common.
Darrell: Yeah. And that's why I say even very, very large companies - and we work with companies even up to Fortune 500 - don't have a sense for what's there, and most importantly where it's going to be in the next few days and next couple of weeks.
I say even very, very large companies - and we work with companies even up to Fortune 500 - don't have a sense for what's there, and most importantly where it's going to be in the next few days and next couple of weeks.
Jeff: And you said $900,000 in this case, is that right?
Darrell: Yeah, exactly.
Jeff: All right, I'm going to shut up now. I'm going to let you keep going now. This is very good.
Darrell: I could talk about this concept, but we put it in dozens, and I mean dozens of companies. Those companies have been troubled, he thought he was in trouble but he wasn't. Another case we got, a nonprofit locally here in Oregon a few years ago, called the local provider for the county for funding and they were a mental health firm providing mental health services to 23,000 clients. So they called the county and said, "Hey, this is Tuesday, if we don't have $5 million by Friday, we can't make payroll. So we've got 23,000 patients on the street." Of course the county panicked. The auditor called me, "What do we do?" And over the course of about a week they had probably 15 checking accounts, as I recall. And we put this procedure in place and it involved funding beyond the county. It included the state, federal and so forth. And then every week all the creditors and all the funders would have a phone call on Monday to review commonly the rolling cash flow to get a better handle on things. It took about three to four weeks to do that for them, they were such a mess. But that tool can be used in strong companies or weak companies as the case may be.
Jeff: Explain to us how this thing ... It is in fact a rolling model and that you're talking about rolling from period to period. Explain, since we don't have the benefit of a visual here for folks until they visit the website and they can pull that file down on morganandwestfield.com. How does this work in theory? You just kind of plant that idea in our head, our visual.
Darrell: Let's say you're in your automobile and you have a GPS unit. You know where you are now probably, but the rolling cash flow tells you where you've come from. And I said three weeks, sometimes we'll make it four history, sometimes a little bit longer. You'll see one week ago we had this much in and this much out. Two weeks ago we had this much in and this much out, and so on and so forth. That tells you how you get to where you are today, that's important. But it doesn't tell you what's more important, meaning where are we going tomorrow, and the next day, and the subsequent three weeks from a cash perspective. So it allows somebody, your controller, your CFO, your chief bookkeeper to prepare the schedule on literally a daily basis. And so if I estimate, let's say, $1,000 is coming in tomorrow and I have to spend $750 on some payment. Once tomorrow arrives, let's say I've received a little bit more, $1,200, I just enter that amount, and it, as you said, rolls automatically forward. If I don't have to cover that $750 I might be able to defer today, but that's the benefit of the rolling cash flow, it gives you those headlights into the future.
For example, Jeff, whenever we're involved in valuation, it's one of the questions we routinely ask management. We'll say what are the key measures, or benchmarks, or metrics that you use to run your business. And invariably they're going to say backlog, or phone calls, or some other measure, and invariably they'll say cash balance. Cash balance means different things to different people, but knowing that cash is important and they rely on that, it's more important that they know where it's going to be. And that's where the benefit of the cash flow comes in, because it gives them a near term and short term outlook as to how much I can expect to come in this week, and how much I must spend this week, and whether or not I need to adjust that timing.
Now when we get involved in valuation, conceptually, valuation only has three parts to it. It has what's called an economic benefits stream. That's the forward-looking net income, if you will. It also has a required rate of return, and whatever that quotient is, that result there could be secondary adjustments, like for liquidity. The challenge in the economic benefit stream is two things, the history and the veracity of the financial reporting, because that's the baseline upon which the forward-looking sight is built. And so, based upon that, we invariably ask, where do you expect to be? And even very large companies often don't have a good answer for that. That tells us they probably need this RCF, this rolling cash flow tool.
Let's say you're in your automobile and you have a GPS unit. You know where you are now probably, but the rolling cash flow tells you where you've come from. And I said three weeks, sometimes we'll make it four history, sometimes a little bit longer. You'll see one week ago we had this much in and this much out. Two weeks ago we had this much in and this much out, and so on and so forth.
Jeff: Darrell, let me ask you just really quickly, how easy is this to implement right away? Supposing with the links on the Morgan & Westfield website, how easy is it for someone to get started with us as soon as possible?
Darrell: If it took more than an hour of a company calling for assistance I'd be very surprised. Usually what we'll do is we'll send them the Excel spreadsheet. We'll show them how it works. And I think that anybody with even nominal capability, bookkeeper, accountant, controller and so forth. We tell them, “Do this. Put it into place, get a three ring binder, and every Monday, or Friday, whatever you decide upon, print it out,” and we have them send it to us about two or three weeks to make sure they're doing it properly and if they have questions. And after that they're off and running. So it is almost no time for the company to do so. And there's no obligation from us, no cost whatsoever to do it.
Jeff: Darrell, we're going to take a short break, but when we come back, we're going to talk also about revenue and how to address those issues as well and you've got some thoughts about that with this financial triage presentation and we're going to continue our conversation with Darrell Dorrell, he’s the principal at Financial Forensics, when “Deal Talk” returns after this.
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Jeff: My name is Jeff Allen, back with Darrell Dorrell from Financial Forensics, and we're talking about financial triage today and what you can do. We've already talked a little bit about rolling cash flow. This is a presentation that Darrell and his team at Financial Forensics have given many times to businesses, and today you're getting an opportunity to learn too what so many other folks have learned from across the country about ways that you can address these cash flow problems and revenue issues as well and how to better track these things. Remember, it all comes back to the value of your company. All of this stuff is going to be reflected. And if you don't know where your money is or you don't know where your cash flow issues lie and how to correct these problems, you're really going to be hung out to dry later on when you come out to have your business appraised, you bring an appraiser out, and you’re trying to sell your company, and you've got all of these financial issues to deal with.
Darrell, thank you so much for sticking with us through the break. Let's now talk about the daily revenue chart, why this is important. Tell us first of all what the chart actually is and what it reflects.
Darrell: Will do, Jeff. The daily revenue chart addresses the sales and revenue of a company. For example, I have asked this question probably hundreds if not thousands of times to clients over the years. The question is, “Would you like to increase your revenue?” No one has ever said no.
The daily revenue chart addresses the sales and revenue of a company.
Jeff: I can't imagine why.
Darrell: As you might expect. The question becomes how. This tool, I stumbled across this years ago, and it measures on a daily and cumulative basis the revenue that the company has received. It's a one-page document, it's built in Excel, and it shows a bar chart for the daily revenue compared to the daily estimate of revenue. And a cumulative line chart towards the month's estimate of revenue. The reason it works, and it's almost like aspirin to a third world country, it works because there's a phrase that says, "As measurement goes, so goes the behavior." "As measurement goes, so goes the behavior." Now think about that. If you measure something, it will get better. If you track it, that's the measurement process, and this is a very, very visual document. I'll give you some examples of that.
We were working for a paper distributor that ran on three shifts. As you know from distribution and manufacturing if shift one does X, shift two does about 70 percent of X, and shift three does about 50 percent of shift two. The question was how do we increase productivity through shift three? In that case they measured their output by tonnage. And so the idea was that the floor supervisor at the end of each day, that shift at night, would put a ladder at the overhead door and crawl up to a large piece of flip chart type paper that was taped to the side of the wall above the door. We already put the X and Y coordinates on it and showed him what to do about daily - he would use a magic marker to show the bar graph or the daily output, and then a matching line graph that showed the cumulative output. The plan was: he was supposed to A, do that every day, which he did, but he was also supposed to explain to the seven guys on the shift what it meant. We came in about 10 years later, talked to him. He had forgotten to explain to the troops what he was doing. Interestingly, each of them intuitively got what the idea was, and productivity started to go up just on the basis of seeing that visual.
Another example is a cold storage door manufacturer. It had never been able to manufacture more than 80 doors of a particular type over a one month period. So we trained the supervisors, we put this tool into place, it would be printed out every day and updated. And just on the first pass alone it had 96 doors even though they'd never exceeded 80. So the idea is seeing a visual that tells you what you've done, what you're doing, how that's moving you towards your monthly target is an extraordinarily simple but powerful tool.
So the idea is seeing a visual that tells you what you've done, what you're doing, how that's moving you towards your monthly target is an extraordinarily simple but powerful tool.
Jeff: So there's some psychology involved here, but really it is a way to reinforce and support as you mentioned what it is that you're doing. And it helps to kind of drive productivity moving forward. And so this is quite an interesting concept, which, by the way, when you think about it, there's really some common sense behind it too. It's just a matter, though, of putting it in a chart and sticking it up on the wall rather than take and put it in a book and leave it on a desk someplace.
Darrell: Exactly. And you said it. A friend of mine's a psychiatrist. He says that the psychological aspect of something called task clarity and that human beings focus on 24-hour windows because that's the way we naturally live. And so if you see what you've done today when you come in tomorrow, and if you haven't hit yesterday’s, which is today's goal, it tells you to amp it up just a little bit. And once you see the cumulative result through the line of your contributions throughout the month, it's very rewarding to know that what you're doing has a direct impact on your personal responsibilities.
Jeff: It's really interesting, that concept, Darrell, has been used by charities. Many of us have worked at offices in our workplaces where we are participating in fundraising drives. And usually the person in the office who's responsible for that fundraising drive will have a chart on an easel and it's there, and then they go ahead, and maybe it could be anything. It could look like when they have these fundraisers in the summer it usually uses a thermometer. They'll have this image of a thermometer, and it'll start out with the donations at the very bottom of that thermometer. They continue to come in. The "mercury" in that thermometer will continue to go up. And isn't it something, that something that is that simple is that effective with proven results?
Darrell: It is, Jeff. And I would make one comment though. The shortfall of a thermometer is that it doesn't measure on a daily basis the results.
The shortfall of a thermometer is that it doesn't measure on a daily basis the results.
Jeff: That's true.
Darrell: And so consequently when we set up ... let's see ... this is 29 days here in February. So we would set up, if their target is $500,000 for the month, we divide that by 29, assuming they work every day. If they don't, we would account for weekends, which gives them a daily target to achieve. The bar graph tells them on a daily basis how they're doing, and the line graph, which is cumulative, tells them how they're moving towards that 29-day window. And that's where the concept of this task clarity comes in with respect to that day by day cycle that human beings live and function in. But the catchphrase we constantly use is that “As measurement goes, so goes the behavior.” And I could literally talk for hours about it. And in fact, I’ll say this, for the listeners. And I should've said for the rolling cash flow, but both for the rolling cash flow and the daily task clarity. If you will put in the revenue chart, for example, I can almost guarantee revenue will go up just by virtue of watching it and measuring it that way. I don't know why that works. It's an extraordinary phenomenon. But I can all but guarantee success from a revenue perspective.
Jeff: And, by the way, Darrell, I think it's probably worth mentioning here, this is something that will work for any kind of business, any industry, any sector regardless of what you're doing, and including, I would imagine, sole proprietors and those folks who are working at home even as freelancers. If you've got a big business and you're busy, and you've been at it for a while, then this, maybe perhaps scaled down somewhat, is still going to be an effective tool.
Darrell: It is. In fact, the genesis of it, I collect old business text books, pretty exciting hobby. I found a textbook from somewhere 1880's, 1890's, or something to that effect.
Jeff: You're not giving away your age are you there, Darrell? I know for a fact. I've seen your picture.
Darrell: I could barely read at that point. I found that book. The title of the book was “Beat Yesterday.” It was about a ... It's on my library here, probably 10 by 13 inch, hardcover. Each day was a listing, nothing more than a list. And it originated in the retail industry. So back in the day when there were no computers or even mechanical systems, the proprietor would write down what he sold. And then that gave him the ability the next day to look at how he did and see if he could beat that. That was the concept of “Beat Yesterday.” The technique has been around decades at least, if not longer.
Jeff: It really does sound like something that again, and it seems so commonsensical. But unless you see it, unless you see this chart, and I'm looking at it right now, you would just be surprised at how simple the concept is, but you have to put it to work. And this is particularly important for those businesses out there. If you're a business owner and you're considering selling your company within the next two, three, five years, and you’re concerned about revenue and you're concerned about cash flow issues right now and worrying about, "I need to solve these things before I get somebody in here, before any ... I'm going to be able to list this company and get anybody to come here and take interest in it. Or if I want to get the value that I'm looking for to get out of my company,” well, these are certain things that you can address. You can address them right now, you can take care of them, and you can see the results happen.
Now, Darrell, in the case that we have folks who have some unique problems, or special situations, or they're just looking for personal consultation. Maybe to have you come on out and talk to them. Or they can get on the phone with you, maybe talk with one of your team members, they'd like to reach you, how can they connect?
Darrell: You could look on the Internet, of course, and our firm name is Financial Forensics, and it’s financialforensics.com, two words into one, or a phone number, 503-636-7999, and we're happy to talk with anyone. In fact, one of our taglines is called “Keeping Business in Business.” And these tools, although they sound very simple, I could literally talk all day about how they've worked. In fact, as we speak, we have put it into place with an aerospace company. And you would think that with all the technology they employ that they'd have these already almost second nature to them. Not the case. An aerospace company didn't have an idea where the cash was, or where it was going, or how to increase, in this case, productivity, output of the various manufacturing processes.
They can contact us either way, it's the same thing here. We'll give an hour or more if you need as a courtesy to help you implement it. We'll send the spreadsheets to you so you can put them on your site there, Jeff.
Jeff: I appreciate that, Darrell, thank you so much. We unfortunately have to kind of leave things right here. I do wish that like you talked about we had an hour to discuss all these things, but time is short for us and we'd like to have you back on again down the line. Again, appreciate your participation in “Deal Talk” today.
Darrell: And I appreciate your insight, Jeff, and what you're doing. You're providing a real service to the community who's listening to your broadcasts.
Jeff: We appreciate that, Darrell. Thank you so much for those comments. That's Darrell Dorrell, he's a CPA and principal at Financial Forensics in Lake Oswego, Oregon. Deal Talk is presented by Morgan & Westfield, a nationwide leader in business sales and appraisals.
If you'd like more information about buying or selling a business call Morgan & Westfield at 888-693-7834 or visit morganandwestfield.com. And also, don't forgot “Deal Talk” is available now on a mobile device near you or whatever device you tend to use these days, iTunes has it, so does Stitcher, Libsyn, and of course morganandwestfield.com. Make it a point to check back in with us soon, won't you, for valuable information and insight from our growing list of small business experts here on “Deal Talk.” My name is Jeff Allen. Thanks so much for listening.
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