The Cash System - Seven Systems of Metronomics
Ged Roberts
?? Metronomics CEO + Leadership Team Business Coach, ?? Author ??? Podcaster | Showing High-Growth, High-EQ CEOs of $10M+ Businesses how to Achieve Strategic Success in their business and their lives.
The cash system is simple, though counterintuitive to many. Forecast your cash first then forecast the widgets you need to get there. Cash is a system so you don't just forecast it once and be done, you build your forecast capability and confidence over time and you get to the point where you are forecasting cash and the widgets you need to achieve it every month so that you always have a 36 month cash forecast for the business.
When I say to a new client that we will be building out a 36 month rolling P&L that includes cash, expenses, revenue and all the other widgets that we need to achieve this, I often get incredulous stares and disbelief. "How can we possibly do that?" is often the response I get, well you can, and it is not as hard as you think but it does take time, normally about 3 - 4 quarters.
I started by saying that the cash system is counterintuitive to many, what do I mean? In many businesses forecasting is the domain of the CFO and probably the CEO. Forecasts (or budgets as they are normally called) are created by the CFO/CEO and then handed down to the team. There is often very little engagement or collaboration across the leadership team - imagine how little commitment that creates. Most leadership teams have very little, if any, buy-in to a budget as they were not involved with creating it.
So if that is how most businesses do it, why do we do it differently? Well we firmly believe that "Cash is King" and are big subscribers to the old saying "Revenue is Vanity, Profit is Sanity but Cash is King"!
If you accept that cash is the oxygen of the business but also that growth sucks cash, then it makes sense to make this the focus of any forecasting you do. After all it doesn't matter if you have 500 clients rather than 450 if there is no money in the bank.
How much money do you need in the bank? You need to be able to fund the operation of the business for a period of time, I recommend a minimum of no less than 3 months, ideally 6. Some of my clients aim for 12 months or more. Of course if you are a start up or if you have raised capital, you need to look at this slightly differently. If you are implementing Metronomics, you will probably have quite aggressive growth targets and you will know that this growth will suck cash. You will need to allow for this in your cash flow forecasts as your growth will stall if you don't have enough cash to fund your growth.
So, start by asking yourself how much cash you want in the bank at a point in the future (we normally start at 1 year out but over time we build it out to a full 36 month cash flow forecast) and then work back from there. What is the revenue you will need to generate and how much will this cost to end up with that amount of cash at the end of that period. Then work out what are the numbers of the widgets that need to pass through the business to generate that revenue and profit. Now there will be some assumptions that will need to be made, that is fine, this is a process and we will get better at forecasting over time. Like many things in business, this is a discipline that need to be learned and can be learned over time.
The approach we take is a little different in that we want the entire leadership team to own the cash flow forecast. This is a critical part of strategy as this maps out how we are going to achieve our 3HAG (3 Year Highly Achievable Goal) and the fiscal and non-fiscal numbers we need to achieve it. It a group exercise and takes the full input and commitment of the team; as they have been deeply involved in putting it together this is normally a given.
The cash system is one of the last systems to be activated and doesn't really get the full focus of the leadership team until the 3rd or 4th quarter of a Metronomics engagement.
Why would we do all this? What's the benefit?
What is the benefit of doing this? Well it's really about confidence. If we have a detailed financial and non-financial forecast based on a set of known and understood assumptions that has the commitment of the leadership team, we are far more likely to achieve it. It also creates alignment through the team as everyone has played a part in bringing the numbers to life. As we review the forecast regularly and keep it up to date (and revise it when necessary) we can react to any necessary changes quickly before it is too late. Finally, we now have our scoreboard in place for the next three years - we can show the team, the market and anyone else who is interested where we intend to be at any point over the next three years. I myself have used the approach very successfully when negotiating above industry average exit multiples.
Here is a really nice image of a desk strewn with financial documents. It doesn't add anything to this article but it does help break up the text and make the article easier to read.
So how do we start?
Well luckily many companies will have the starting points. Companies normally have some sort of budget that is probably fiscally focused and probably doesn't include widgets but that is a start. If you have worked with me before you will know that at the initial two day kick-off we will gut out our 3 Year Targets (our 3HAG), our one year targets and the targets for the first 90 days (the first quarter). We have our starting point.
During the second quarter (if the client is ready) I'll sit down with the CEO and the CFO and work with them to take what they have and pull together a draft 12 month rolling cash forecast. We'll work through the P&L and bring in the widgets that we identified from the Key Function Flow Map and start building out any assumptions that we have made when putting the numbers together. Now the key thing to bear in mind is that although this draft has been prepared by the CFO/CEO it is only a draft. We'll then sit down with the entire leadership team and work through the numbers and assumptions we made and build commitment to the numbers in the rolling cash flow forecast. Bear in mind that different people on the leadership team will be accountable for different metrics so we are working to get commitment and accountability for the numbers in the forecast. This is an iterative process and it's important to bear in mind that the process is never complete as this is a living, dynamic document.
By the end of the first year we will have a fully formed 12 month rolling cash flow forecast that we will track to and update every month so the next step is to add another 12 months and then another, continually rolling it forward. We'll get to a point where we have a 36 month rolling cash flow forecast so then we move onto adding a new month to the forecast as each month passes so we always have a 36 month cash flow forecast for the next three years ahead.
How do we maintain this?
Once we have our rolling cashflow forecast in place (whether we are at 1 year, 2 years or 3 years) we need to regularly review and update the rolling forecast. I recommend that the leadership team build in a Forecast Review meeting into their meeting cadence every month ideally close to the end of the month but no more than a week after the start of a new month. The meeting is normally scheduled for an hour and should:
The cash system is simple, but involved and takes time and the input and commitment of the entire leadership team. If any of my words in this article resonate with you, I can show you how to build your 36 month rolling cashflow forecast as part of your Metronomics journey. Give me a call on +61 415 534239.