In a quarterly planning session 6 months ago, the team I was working with expressed great frustration with the inconsistency of their profit and cash flow. In some quarters, they did very well, while in others they barely broke even. In no recent period, however, did they generate as much profit and cash as they thought they should.
It was time for a deeper dive, so the team and I decided to pull out a tool called “The 8 Cash Flow DriversTM” from the EOS® toolbox and see what we could do.
Using this tool, we built a list of more than 20 “drivers” of profit and cash—revenue, expenses, production yields, scrap rates, inventory and so on. Once we had them all on the board, we went back through the list and asked these basic questions:
- Is this something over which we have reasonable control?
- Is it something we can readily measure on a weekly or monthly basis?
- Which direction—up or down—do we need the number to move in order to improve performance? (While this may seem obvious, we learned that being on the same page about it was extremely helpful.)
Based on the answers to these three questions, we combined a few, eliminated a few and ended up with 8 drivers on which the team could focus its improvement efforts.
We then asked ourselves what a modest improvement in each of the 8 drivers would look like. The team agreed that with proper focus and attention, an improvement of at least 5% was possible for a few of the drivers, while others could be improved by as much as 20%.
Finally, we estimated how those improvements would translate in terms of improved profit this year, as well as over the following 2 years. The math revealed that the company was sitting on an annual profit improvement opportunity of roughly $675,000, which is equal to 15% of the topline sales for this $4.5 million company.
From there, we quickly assigned accountability, decided which drivers would be measured weekly vs. monthly and where they would be tracked (weekly scorecard, monthly P&L, balance sheet or budget). The team members then set Rocks (quarterly goals) for the performance improvements they owned and got to work on them.
This is a quick exercise. It took the team less than 90 minutes to identify $675,000 possible profit improvements and to decide how they were going to get them.
Did it work? Well, fast forward 6 months. For the first time in over a year, the company showed an improvement in quarterly profitability. The improvement, which was 21% over the same quarter last year, exceeded the prediction we made just 6 months earlier. All signs point to these performance improvements being sustained.
Here are the key things we learned using this simple tool:
- The status quo is the enemy. It’s comfortable and familiar, and that makes profit improvement opportunities easy to overlook. The improvements this team found were hiding in plain sight. They needed a structured process to find and focus on them.
- Limiting themselves to a handful of drivers that were easily measured allowed the team to keep its list small and impactful, and to get some wins now. It’s not that the other drivers aren’t important—they’re just opportunities for another day.
- Estimating the yearly profit opportunity made the exercise real and exciting, while also providing a compelling reason (actually $675,000 of them) for the team to stay laser-focused on achieving the improvements they identified.
If you’d like this kind of win in your business, let us know. We’d love to show you how “The 8 Cash Flow Drivers” and the other tools of EOS can get you there.
