EP51 Mastering Cash Flow for Business Success

Summary

In this conversation, Mike and Troye delve into the critical topic of cash flow, exploring its significance in business success. They discuss the evolution of business metrics from revenue to cash flow, emphasizing the importance of understanding cash flow as a leadership and management tool. The conversation also covers practical techniques for managing cash flow, including forecasting and analyzing past cash movements. Finally, they outline seven key strategies for improving cash flow, providing actionable insights for business owners.


Takeaways

Revenue means nothing without margin.
Profit is important, but cash is the ultimate reality.
Cash flow is the movement of cash in and out of your bank account.
Understanding cash flow helps in making better business decisions.
You should focus on generating free cash flow for business success.
Increasing prices can be a quick way to improve cash flow.
Improving debtor days can significantly impact cash flow.
Cash flow management is a leadership tool, not just a finance tool.
Scenario planning is essential for effective cash flow management.
Building reserves gives businesses optionality and resilience.

Chapters

00:00 Understanding Cash Flow: The Foundation of Business Success
10:38 The Evolution of Business Metrics: From Revenue to Cash Flow
19:39 Measuring Cash Flow: Tools and Techniques
26:21 Seven Levers to Improve Cash Flow
35:25 Shifting Mindsets: From Operator to Capital Allocator

cash flow, business success, revenue, profit, financial management, leadership, cash flow management, business metrics, financial health, cash flow strategies

Find out more about working with me or about applying to join the ILN. mike@smbmastery.com.au

https://www.linkedin.com/in/mikeadamscott/

https://theintentionalleaders.com/

Transcript

Mike Scott (00:01.152)
Okay, so we're back and this is a little bit of building in public and a little bit of what's top of mind. We've just come out of a monthly growth meeting with one of the ILN circles and this topic is always in the circles and the topic is cash flow. And we're building a set of challenges, the first of which is probably going to be cash flow or at least the first of these things. So this is very top of mind for Troy and I.

We're thinking about it, we're learning about it, we're taking what we know and putting it into practice. So today this is us exploring cashflow, what it is, why you should care about it, how to improve it, what the impact is, all of that stuff. Hi Troy, what's happening?

Troye (00:45.079)
Yo, not much. I've spent the morning building challenges. So I'm quite excited to speak all about it and ask, just sort of build this in public, like, nuts out a couple of questions that I have and thoughts about it. I don't feel like I'm a cashflow king, but you talk about it all the time. And I guess the first way to start with this is why did...

You pushed for this. You were like, our first one needs to be Cash Flow. And I'm just wondering why you thought that was important.

Mike Scott (01:20.014)
Yeah, so firstly, for all the members listening to this, the first one is not gonna be cash flow because it's a bigger monster than we realized. So we gotta break this into bites, but it's coming soon. So why? Okay, my mentor used to say something to me a lot and he used to say, Mike, revenue is vanity, it doesn't mean anything. Profit is sanity, it means a bit, but cash is the only reality. And it took me about 10 years to understand what he meant.

When I work with CEOs and leadership teams, I draw this into their skulls until they say it like a mantra. But it's an amazing thing that happens when people start to actually experience it. What do I mean by this? I mean that revenue means nothing without margin, right? And now look, there are certain fringe cases and like very heavily backed venture, know, venture backed companies that are looking for market share or a land grab. Sure. Like those aside, but revenue for the most part, if you say, Hey, my revenue is $10 million, it means nothing.

because your expenses could be $11 million. Right? Similarly, there are companies that are running like a 1 % net margin. So they're doing a huge amount of revenue, but they're not making any money. Okay, so that's revenue. That's why I don't really care about revenue because I'm not a tech startup expert. I like to work with businesses that actually generate free cashflow. So then we go down from revenue to profit. Profit now means a little bit more because it means you're actually making money, at least on paper.

Right, so here it's like, okay, you're doing $10 million of revenue, cool, but how much of that is gross profit? And then how much of that is net profit or EBITDA, depending on how you account for profit. Now this means a little bit more because this is like actually making money. But those of you that are listening to this that have been in business for a while have probably had the experience of getting to the end of financial year, your accountant gives you management accounts or financials, and they tell you, well done, you made.

$100,000 of profit and you go that's fantastic, but you look at your bank balance and it's not there and you go what the hell's going on here? Where's this money? Right? That's why generation of free cash flow I think is the ultimate metric of financial business success and it's also what investors typically look for in a private equity sort of scenario. So what am I saying there? It's a single source of truth, right? If you're not generating free cash, it's very hard to run a business. So let me stop there.

Mike Scott (03:43.502)
Does that answer your question?

Troye (03:45.35)
Yeah, yeah, I love it. It happens to me all the time when people tell me they've got this awesome, this revenue business. People love it. I've got this $100 million business. And I always sit there and go, yeah, but how much are you actually making in the end? Because I think your business is even a business similar, I've had my previous business, it was like we were small. We weren't generating that much revenue. But half of it was like cash in the bank. It was awesome. And so I think that profit and that profit thing.

resonates with me so much. Because you buy something, like you buy an asset, and then they depreciate that. it just comes in and I was like, this doesn't count on one thing and counts on the other thing. And I'm not smart. I just get confused when the accountants bring out all this stuff. So for me, it's always been like, I look at the bank account. What's in the bank account is what really, what really matters. But we talk

a lot about different things. I think that often sort of conversations pass like ships in the night if you're not on the same page as to exactly what we're talking about. So again, as I was saying before, like I love the finance part of things, but I get very sort of confused very quickly of when people are talking about different things. When you talk about cash flow, like what exactly are you talking about here?

Mike Scott (05:12.334)
Yeah, I wanna make something really clear. I mean, Troy, you know, I'm terrible at finance. Like, I just wanna be really, really clear about this. Like, I'm not a finance guy at all. Like, I'm really not. And this is, but this is a very, I you shaking your head, but like. No. But I'm not a finance, like, I'm really not. Like, the point I'm making here is like, this is a leadership and management tool. It's not a finance tool. Like, this is the point I'm trying to make here. Like.

Troye (05:24.38)
shaking your head because you're so good at it but I feel like I'm in the same boat yeah no no I'm the same I'm like it's I'm not an accountant I'm not a finance guy.

Mike Scott (05:40.302)
I'm not an accountant. If you're an accountant listening to this, you're probably gonna laugh at my rudimentary knowledge, but that's a point, right? Like totally these moves, right? But I know how to run business and you know how to run business. We have run businesses. We are running multiple businesses. And I really wanna drum that point home. This is not a finance episode. This is a leadership and management episode. So I've totally forgotten your question. What was the question? Like what is cashflow? Yeah.

Troye (05:44.982)
They're rolling their eyes, the accountants, they're like, look at these two, like, muppets.

Troye (06:06.358)
What's cashflow? Like when we're sitting together talking about it, like, why don't we talk about cashflow? What do we mean? And I 100 % agree. Like I know finance from a running the business point of view. I'm not an accountant, but yeah, what exactly is cashflow?

Mike Scott (06:17.154)
Yeah. So cashflow is the movement of cash in and out of your bank account. Like it is that simple. It's not theoretical. It's not accrual. It's the movement of cash in and out of your bank account. So this is one of the only places where we put on sales tax. So in Australia, we call it GST. In South Africa, it's called VAT, et cetera, et cetera. Like this is one of the only places when we're sort of like leadership accounting, I'm gonna call it, not management accounting, because that's got a different connotation.

where we do actually include sales tax because it's the movement of cash in and out of your bank account. And what we want as a tool is we want a visualization of when money is going to flow in, when money is going to flow out and our best estimate of what that's gonna look like tomorrow, next week, next month, six months, a year from now. Why? Because it helps us make better decisions. That's why.

Troye (07:13.75)
Well, that leads me to my next sort of thought is like, you're talking about this as a leadership thing. the whole reason why we are here is to think about sort of leveling up, thinking about performance. That's what we love. Like this is what we care for ourselves and sharing it with other people. So I'm just like, if I'm changing from my thinking like as a leadership point of view to this cashflow thing, like how is that going to help me level it up?

Like, am going to turn? Because if revenue is my thing in the end, I want to grow my business in whatever capacity that is. Like, why should I change to cash?

Mike Scott (07:44.206)
Okay, yeah.

Mike Scott (07:54.072)
So think to understand that, we've got to understand the sort of evolution of thinking of a founder. So like this is very stereotypical, but I really like this because I experienced this myself. In the beginning, when we started business, we obsess over revenue. Why do we do that? We do that because it gives us very strong signals of market demand, like do people want what we're selling? It gives us strong signals of our sales engine and whether it's working or not, because revenue is the result of closing sales. And it gives us a sense of like,

How could we grow? So it's not like, it's not a useless metric. It's just, that's what we do in the beginning. We just go, can we sell this thing? We'll figure out the margin later. Cool, so we sell. But what it's hiding is working capital drag. We won't get too much into working capital today. It's hiding margins, like you're actually making money. It's hiding low quality customers and low quality deals. It's hiding delivery inefficiency. Okay, so then we sort of progress and we go, hold on, let's stop obsessing just over

revenue, which for most early stage founders is just sales. And let's start thinking about profit, about margin. So why does this matter? Well, this matters because that shows operational discipline and efficiency. It shows pricing. Like, do we have pricing power? Are we just trying to discount everything, which is a raise to zero? Or are we actually differentiating on other stuff, right? But it also can mislead us a little bit in terms of the ability to generate

free cash flow, right? So when we sort of, let's say, graduate to this sort of cash flow, this generation of key cash flow obsession, it matters because then we actually have cash in the business that we can distribute it through dividends, right? Nobody ever got rich off a salary. Like you get rich off equity, off dividend distribution and reinvesting and capital allocation. It allows us to reinvest in the business.

We can get better people, we can get better machinery, we can get better inventory, we can get a wider range of inventory, we can, who knows, like reinvest. It allows us to build reserves. Why do reserves matter? Because they give us optionality. When we've got a strong amount of cash on the balance sheet, not profit, cash, we have this weird thing that we approach problems not from a place of fear, but from a place of abundance and optionality. Better clients, better people, better products, et cetera. From an investor perspective,

Mike Scott (10:15.702)
Investors love the ability to generate free cash. Why? Because they're get their return quicker. Profit on paper is not that useful. Cash in the bank, distributable dividends is what investors are really looking for, at least private equity style investors. So lots of words there, but to summarize that it's kind of like revenue shows growth engine capability, demand, et cetera. Profit shows efficiency, pricing power, and delivery mechanics.

Cash just levels it all up and gives you a ton of optionality and allows you to sort of graduate to this capital allocator, which is like, that's where you really start to make real wealth. Does that make sense?

Troye (10:59.85)
Yeah, I like it. I I think that just to be clear, like revenue and profit are important here. We're just focusing on cash flow and we can have other talks on. And I do like what you're saying is like revenue is product market fit is the growth of your business. It just reminded me of an interesting thought is like if you're running a hundred million dollar a year business in revenue.

That's awesome from a purpose point of view, because whatever your product is, like if it's your widget or your service or whatever, it means that you're spreading your purpose wider and bigger, which I think is actually quite cool. It also means that you're your employees, you're building a business that's for your employees. So they're paying a salary, you're giving them a purpose and a reason to do things. So that's a really cool reason to sort of have a high revenue. But if your margins are zero,

That's all you kind of doing. Like your business is awesome because it's doing all this awesome stuff, but that's all. But I love the resilience part of things. I mean, when there's a downturn or if there's something, if you care about the legacy of your business, if you care about your business being here for the long term, then having that resilience is really cool.

Mike Scott (12:15.5)
I mean, you say resilience, that's one of it, but I just call that optionality. Like it just gives you options. It just gives you options to do stuff, hire better people, explore other things, have more fun, do more for your team, for your staff. Like just give you options. Like finance, money solves money problems. And one of the things, one of the money problems in personal and business life is a lack of options, right? Whenever people talk about trying to be free, like trying to be rich, they're really talking about trying to be free. And it's really like to do what you want when you want. This is the same in business.

Troye (12:19.583)
and optionality.

Troye (12:23.414)
Hmm.

Troye (12:27.924)
Yeah, yeah.

Troye (12:37.322)
Mmm.

Troye (12:46.1)
That's what Warren Buffett, think, mean, we have always asked me for sources of what I say these days, which is pretty cool, because half realizes half of the stuff is just anecdotal. But my understanding with Warren Buffett is that that's what he optimizes for, is to be able to always have options so that when there's a downturn in the market, he doesn't have to sell. And when there's an upturn, he's ready to jump on that, which is pretty cool. Talking about selling businesses.

I want to tell you a story. Gen-wise, for some reason, my previous business, we slipped and fell and ended up in a cash generating business. We had a fair amount of cash flow, like positive cash flow. But it made the business really hard to sell, not because we couldn't find a buyer, but actually because I didn't want to sell it because it was generating so much cash that was working on my lifestyle.

And in fact, it was super easy to sell because my business partner at the time just walked into the other company, said, hey, do you want to buy our business? And they ended up buying our business. So it was actually really easy from that point of view to sell. But from my point of view, from an emotional point of view, our multiple had to be really high because it had to compensate for this cash flow generation.

Mike Scott (14:03.616)
And you didn't anyway talk about profit or revenue there. It was like, I didn't want to sell this because the cash it was generating us on a week to week basis was very high. I don't know what your multiple was, but my guess is it was going to be considerably like higher than normal, possibly even in the double digits because of the cash component. But tell me, like, I don't even know.

Troye (14:21.366)
Oh, no, I can't remember. The whole thing with this is it's so amusing. I mean, it's so amusing because it was all at 100. When I talk about being lucky, a lot of people push back, but a lot of the stuff we kind of, it feels like we slipped and fell and ended up in this position. I've learned a hell of a lot from it. And I can go back and say and laugh at how naive I was at times. But I think the point for this conversation is that...

Mike Scott (14:23.31)
I love that.

Troye (14:48.726)
It was just a really cool place to be where we could be like the person that had to basically we could say if they didn't offer us that multiple and was higher than like it was a tech multiple more than a services multiple. I think I guess what I was saying is people like I tell them the multiple when I didn't know what are you talking about? But the reason wasn't had to be there because I wouldn't have sold for less like that. would not have sold for less because I'd been like what's the point in selling this business that's making me.

Mike Scott (15:16.718)
Well, this is the thing is you want to sell your business when you don't want to sell your business. That gives you leverage in the negotiation. I think to demonstrate this point, I want to give like, might be quite tricky to follow this in like just over the year, but if we take two businesses, right? And I've written down an example here just to try and illustrate the point. If we take two businesses and they're both doing $5 million EBITDA. So for those of you who don't know what EBITDA is, it's a really long acronym. That's a measure of profit earnings before interest tax depreciation and amortization.

Troye (15:21.078)
Mmm.

Mike Scott (15:46.632)
Or if you wanna have a quick chuckle, it's earnings before I tricked the dumb accountant, but that's just an inside joke, because it's very manipulable. But okay, so let's say two businesses doing $5 million of profit. Business A converts 90 % to cash. They have a 30-day debtor cycle, and they have a low capital expense in the business, but they're generating $5 million of profit. Business B.

only converts 50 % to cash. The rest has to stay in the business. They have 120 day debtor cycle and they've got heavy reinvestment, which is why they're not converting it to cash. These two businesses, although they're both doing the same amount of profit, will get very different valuations from an investor. That's the simplest way I can kind of describe this. Why? Because the one is generating more cash to distribute or do stuff with.

The other one keeps the cash locked up. You can't actually get it out, even though the profit is identical. And this is one of the reasons why we wanna obsess over free cashflow, because you can't hide behind it.

Troye (17:00.438)
I'm going to, I'm going to micrify this and let's get actionable. Okay, so I've got a business, I believe you, and this is kind of speaking about the cash flow challenge. So how do we become actionable about this? I guess the first thing is we've got to our cash flow. How do we do that? Let's talk about, do we do it in the past? Let's do it in the past.

Like how do we measure our cash flow?

Mike Scott (17:31.054)
So I'll just, it's gonna be a little bit tricky to talk about this, but you can do a very simple Excel spreadsheet with this, right? So this is not a cashflow statement. So you get your balance sheet, your income statement, and a cashflow statement. That's not this. I'm not an accountant. I'm not even a finance guy at all. This is a tool to help you make better decisions. So the way I do my cashflow, and always have done cashflow for my current businesses and my previous businesses, is quite simple. I start at the top and I say bank balance today. Then I say, what do I expect to come off?

my bank balance this month and I list all the things there. What are my operating expenses? What do I have to pay the tax authorities? What am I going to reinvest in learning? What are my everything expenses? This is the cash leaving my account and that will have a total. So it's bank balance minus what's coming out of my account in the next month, in the month of February. Then I have another tab.

That is what I expect to actually receive in that month. And I wanna be really clear about this. It's not what I expect to invoice. It's what I expect to actually land in my account. We know that just because you invoice somebody doesn't mean they're gonna pay you, right? This is getting real about when is everyone gonna pay me. Now sure, there's an element of guesstimation here, of course. But it's to the best of your ability. So you do that for January. And then you carry that over to February.

and then March and then April and then all the way. I typically project out about a year. The thing that's changing is the bank balance. So it's bank balance minus all outflows plus all inflows gives me a new bank balance. And I can now trend that bank balance. So I can now look out and go on my best estimate in August this year, this is where my bank account balance is gonna be.

And is it gonna be higher or is it gonna be lower? Obviously we want to see it trending higher. That allows me to make decisions on things. This is a very, very simple thing to build, right? It can get ridiculously complicated if you want this to be like exact specific science and you go, but I only spent $32 last month on coffee and this month I spent 80. That's not what this is about. It's like your closest best estimate, right? To see the trend.

Mike Scott (19:47.448)
Is this making sense, Troy? mean, you have the advantage of having seen these things, but the concept simply.

Troye (19:49.322)
Yeah.

Troye (19:53.706)
Yeah, so I find it's a simple concept and very hard. I find it very hard to execute on. So one of the exercises that I've been doing recently for this challenge is to go backwards and say in August, our bank, so the bank balance was this on the start of the month. Everything that came in was this. Everything that went up is that. Our balance at the end was that. And then I've got a cash flow. The difference between

what was in my bank in the beginning and what I was in my bank at the end, that was the cash flow. And I've actually, it was really awesome. I did that for last couple of months with actually two of the businesses that I'm looking at at the moment. And it was really quite eye-opening. In some months when I thought, geez, I'm very much in the red, in some months I was really in the green and was a bit all over the place.

And then I got up to like here, where I find it really challenging is that projection that you're talking about. So, so we can't get too much in the weeds and because it actually doing it on audio is a bit crazy, but I think there's having a few examples is pretty interesting. Um, because in fact, I'll just, did two, we did an income one and an, and an expenses one. When you say it's not what you've invoiced.

Mike Scott (21:18.146)
So I just want to correct you because language matters. It's not income and expenses. It's inflow and outflow. And this is really, this is a very important point. It's not income and expenses. That's your P &L, your profit and loss. It's money coming in, money going out. That is not necessarily income and expenses.

Troye (21:20.67)
Yes. No, no.

Troye (21:29.086)
Yes.

Troye (21:36.854)
So how do you, for your income, for income and cash for let's say March, because March is coming up now, do you look at your invoices and go, this one has got a good chance of being paid, these guys never pay me, how do you know what's coming in? Because the way I was looking at it is invoices that were expected to come in on the 4th of March. Is that what you do, you use that?

Mike Scott (22:00.876)
Yeah, so if I take SMB Mastery, my consulting coaching facilitation business, it's very, very simple for me because most of my clients are on a pretty set schedule. So it's a very easy thing for me to do. There is some scenario planning to say, hey, I think I might lose that client over there because they're going to get acquired. Like I've got three clients that are busy being acquired, right? So

probably when they get acquired, the nature of our engagement is gonna stop. So I'll go, when do I think that deal's gonna close? Well, I think it's gonna close in December this year. Cool, so then I take it off. Similarly, at the moment, I've got quite a few people that wanna work with me. I can't take on all of them, but I wanna take on maybe one or two of them. So there I'll say, well, I think I'm gonna get a new one-on-one coaching client in the middle of March, and I'm gonna get a new business operating system client in April. So then I put those in and they start stacking, right?

That's a very simple, simple business. Where it gets way more complicated is something like an e-commerce business. All right. The best you can do on something like that is scenario plan. So you can go, cool, how did we do in the last three months, six months, nine months, one year? What is our growth trajectory been? Okay, it's been 20 % year on year. Cool, so we can extrapolate and put that out, but now you wanna be conservative. So there is definitely an element of scenario planning, but that's the point.

That's the point to say, well, what if it does go like this? What do I look like? shit, actually, if we continue like this, I'm be in the red by August this year. That's the point of a cashflow is to tell you you've got a problem before you even know it's happened.

Troye (23:35.21)
Yeah, I like it. I think that one of the things that was really bothering me was in this whole process was trying to turn the challenge into something that fitted every business. But what I'm actually seeing here is you can't just spoon feed this process. As a business leader, you kind of need to get happy with the numbers. But you're doing it yourself a little bit.

This is not something you can get your accountant to go, here's your cash flow projections for, and you just go, cool. Because there are a lot of things you've got to add in. There's lots of things where you've got to go.

Mike Scott (24:11.63)
And there's gonna be, yes, there's gonna be nuance, right? There's gonna be nuance. So for example, I'll just give you some silly things to show you some examples. I know that I'm gonna have a big tax payment to make at tax time. That is not an expense. So it goes on my cashflow. So I know I'm gonna put, I don't know, I'll put a random number, $50,000. So that month's gonna be brutal, right? So now I've got a scenario planning. I've gotta have money in there.

Troye (24:14.614)
Mmm.

Troye (24:22.688)
Yeah.

Troye (24:29.099)
Yeah.

Mike Scott (24:35.098)
And by the way, this is where like when you start noting out on the stuff, this is where things like profit first system really start to become awesome because then it's like, how do I have a system that helps me do that? But we won't go into that today. Similarly, I know what's another example. I'm buying a new car now. So there's gonna probably be a GST inflow of cash. That's not income.

Right, but it's gotta be there. Similarly, there's gonna be another outflow that isn't an expense, but it's gonna be there. So it's the movement of cash. Now the reason why I think an accountant can't do this, especially if it's an outsourced accountant, is because there's gonna be stuff there that they just can't know. I'm going to Thailand to give a keynote in April. I'm probably gonna have to pay for a whole lot of stuff first before I get reimbursed and get paid for the keynote. So there's $10,000. How the hell would my accountant know that? He or she wouldn't, right?

Troy, you and I did the company directors course that cost us $20,000 each. We made quite a spur of the moment decision. That went on the cashflow. They wouldn't have known this. This is why it's a leadership or a management tool because you're putting these things in to create your scenarios. And if you think that this is gonna be automated, well, then don't do it because the whole point of this is to put your data in to see what it does to your scenario to then navigate, right?

We've been talking quite negatively today around like when you run out of cash, but let's take an abundant mindset for a second. Equally, if you see your cash balance trending up and to the right, and you just have too much cash, that's also a problem. You don't want too much cash in your business, right? So you wanna be able to say, okay, well, I see my cash going up. Hey, that's interesting. By next year, I'm gonna have X amount of cash. I need to do something with that. This also allows you to scenario plan for that. That's a great problem to have and that's fun.

That's when cashflow forecasts are really fun. Most people when they start cashflow forecasts, they have a bit of a shit moment. Okay, and that's maybe a segue into probably where this conversation needs to go. Next is once you've done your cashflow forecast document that's now part of your daily or weekly leadership ritual and management ritual, how do you change your cashflow? Right, I'm kind of jumping ahead here. It's probably where you were going. So I don't know, do you want to chime in there before I just?

Mike Scott (26:53.198)
totally take over.

Troye (26:55.158)
I think you're a spot on. think that playing around with these numbers is really cool. So doing the stuff in the past gives you information to project forward into the future. And it can just be something that you're playing with and you're going through. But what you were talking about were the seven levers of cash flow. I've got them written down, so it's not fair. But should I put you on the spot? You can tell me. So the seven levers, yeah.

Mike Scott (27:20.206)
Yeah, no, it's fine. It's fine.

Troye (27:23.762)
Seven Leavers are basically the stuff you can pull, the stuff you can do that'll help improve your cash flow. I'm going to test Mike, see if he's normally got these, but let's see how we go.

Mike Scott (27:35.425)
Cool, so the first one is we can increase price. Okay, so let me just be clear about what we're about this. I'll go through sort of each one a little bit maybe. So we can increase price. Now this is probably the fastest path to cash, more cash, but it's often underused. Why? Because we're scared. We're scared that if we put up our prices, we'll lose customers, but that's a massive lever, increase price. By the way, these increases can be like 1%. They don't have to be 40%, right? Okay, number two, we've got increase volume.

but you only increase volume if it's good volume. Now we back to the revenue thing. You don't increase volume if you're losing money on the volume. It's gotta be good quality volume. What do mean by good quality? If the cash conversion of that volume is good. So increased price, increased volume. You can reduce your cost structure. So this is you can decrease effectively your budgets, right? This is where you try and get more efficient in your delivery.

you know, decrease your coffee spend, I don't know, whatever, but you're basically decreasing your outflow so that more cash is being generated. You can improve your gross margin. So gross margin is what it costs you to deliver your product or service, So this is by getting better customers, better contracts. It's also about efficiency, so better, tighter scope control of the projects you're doing. You can improve your debtor days, right? So,

This is about when you're collecting the cash, not when you're invoicing the cash. So you need to know as an operator, what is your average debtor days? What's the average time it takes a customer to pay you? Let's say that number is 72 days. You need to be able to pull that down to go like, let's get it down to 20 days, right? It'll have a huge impact on your cash flow.

you can improve your credit terms. So what are we talking about here? This is like how long you take to pay your suppliers. Now this one is controversial. There's a fine balance here. You don't wanna screw your suppliers, especially if they're small businesses, you wanna do the right thing. But the quicker you can get paid, debtor days, and the longer you can take to pay your creditors, you have a delta in the amount of time you're holding onto the cash.

Mike Scott (29:54.413)
And then the seventh lever is reducing your capital intensity. So it's how long it takes you to turn over stock. If you're a stock-based business, this means a lot to you. If you're a service-based business, like most of the businesses I've run, it means nothing to you, because I don't hold any stock, I never have.

Troye (30:14.07)
It's a pending work situation then. the equivalent in a services business is somebody says, can you deliver this document to me, this website to me, and you say yes and it takes two months. So if you can bring that down to one month, it's quicker. So it's the same idea, just a different, it's the same sort of concept, just different.

Mike Scott (30:31.844)
No, it's actually not. So this is when you have paid for stuff that's sitting on shelves. What you're talking about more is like data days or supply terms. By the way, totally just to kudos for remembering those. They're written in front of me on a list. So don't give me any credit for that. I had notes for this beforehand. So I'd love to take a bow on that, but I can't. So let's just go through those again. Increase price, increase volume, but only if the volume is good quality volume. Reduce your cost structures, improve your gross margin.

improve your debtor days, improve your creditor terms, and reduce your capital intensity if you are a stock and inventory-based business. These things sound easy to do. Some of them are quite easy to do, but the point of this is that, you know, it's out of the scope for this podcast, but not all of these are going to be more like totally relevant for your business. But with things like LLMs, go to ChatGPT, type in.

the seven levers of cash flow that are relevant to my industry, and you're gonna get a pretty damn good start here, here, and here, right? And you begin to pull these levers. It's not a magician dance, right? You can enormously increase your cash flow and your cash conversion and your cash balances without actually changing how much you sell just by pulling these levers. Let me stop there for a second, Troy. What's going, what's bouncing around in your head?

Troye (31:54.336)
Yeah, couple of things, attention. I think there's a tension between price and volume. Because as you increase your price, you risk decreasing your volume. Definitely this has happened in one of my previous businesses is that there was a point in which you've increased your sales go drop if your price goes up. My understanding though is that generally most people

If they increase their prices, it won't make any difference to that. So that's something to think about a lot. And the days receivable and the days payable, I kind of think that's interesting as well, because if you look at your business, again, there's a tension between your business and everybody else's business, where you want to hold onto your cash, they want to hold onto their cash, and everyone's like holding onto their cash. I would suggest that be cool. I just think pay your debts as fast as you can.

and then just bring down, try and bring your days receivable down. Because if everyone in the world did that, like if your days receivable, like when you were getting your income was really 10 days and you pay within 10 days, then everything would be, the world would be a cooler place. So I think there's some tension there as well.

Mike Scott (33:07.819)
Yeah, I mean, you know my thoughts on that. I think I will add though, yeah, I want to pay people immediately. mean, I have a client who pays me, it's crazy. I have a client who pays me on the same day that I send them an invoice. And it just makes me so happy. Like I just like them. And Tim, that's you buddy. I know you'll be listening to this. like, yeah, well done, Tim. No, but it really does. Like it has an impact. It's crazy.

Troye (33:11.796)
Yeah, you drive me crazy.

Troye (33:27.702)
Well done, Simp.

Troye (33:33.29)
does.

Mike Scott (33:34.603)
I've never ever dealt with a company like that. Like I send an invoice and it's paid the same day. I mean, it's just incredible what it does for a relationship. but it can be a huge detriment to you if you do that with everyone. And this is where you've got to balance values and strategy and everything else, right? If you are a very high inventory business, you probably don't want to do that, to be honest. It could actually kill your business from a working capital perspective. But.

Troye (33:52.907)
Yeah.

Troye (33:59.914)
Well, just to keep going.

Mike Scott (34:01.741)
I want to finish off my point there, but what's very important is this isn't about stretching out and taking advantage. It's about being very clear and open and negotiating these things in the open with your suppliers. One of my mentors, who was a self-made billionaire, it was amazing. He taught me this never by saying it, but when he took me out for lunch, I've known him since I was a kid, from a teenage, he was one of my best friend's dads and then later on became a mentor. He used to tip.

the serving staff, like the waiters and waitresses, ridiculously well. Right, like ridiculously well. I he would tip like 50 % of the value of the meal. And one day, like I asked him what that was all about, and he just said, you take very, very good care of your suppliers, because you never know when you're gonna need them, and you need to build up that goodwill. And this was a guy who ran multi-billion dollar retail companies, which are notorious for not taking care of their suppliers.

He never really taught me the lesson. He kind of showed me the lesson. And I've really tried to do that wherever I can. Anyway, sorry, I wanted to finish that point. What were you saying?

Troye (35:08.642)
Yeah. No, no, that's a super important one and I love it because I've heard you tell that story before and it goes on to like coming back to him and really helping out. No, it was you. There comes a day when you need people and they remember these things. But I guess I'm just saying that this whole process is hurting. I find it quite challenging in my current business because I like to pay my supplies, the doctors that work with me, I like to pay them really quickly.

but I work with a big company that takes quite a long time to pay me. And what happens is when my company grows, I'm sitting there with a month of just going, I have to kind of, I have to hold that because I like to pay my doctors within a week, but it could take me 30 days to get that cash. So it does hurt.

Mike Scott (35:55.883)
And this is where these horrible stories where you grow to death. So you could scale that business and it could kill you because of the cash impact, even though you're very profitable. Like this is a good example, right? So I'm conscious of time. We don't want to spend too much more time on the subject. I think, you if you're listening to this and you're going, jeez, this is overwhelming. Like I get it. It is a bit, right? But the quicker you can shift your mindset from like an operator mindset, which is like, how do I sell more? How do we grow more? Don't get me wrong.

Troye (35:59.754)
Yeah.

Mike Scott (36:25.729)
Great, but the evolution is from an operator mindset to a capital allocator mindset. You never lose the operator mindset, but there's like an evolution onto a capital allocator, which is less about how do we sell more, how do we grow revenue, and more about how do we get the maximum return from our next dollar? Where should this dollar go? Does it go to marketing, debt reduction, dividends, or acquisition in the context of the cash return on investment? This is an elevated level of operator.

Right. Hence the reason we're building a challenge for this in the ILN because very few business owner operators do this work kind of on their own because it's like it requires effort, right? And a bit of accountability. But I can tell you from my own experience, this simple tool, because it's a very simple tool actually when you build it, it's like we've been speaking and making it sound very, I don't know, jargony and what have you. It's actually an incredibly simple tool. When you build this tool, my experience is it's gotten me out of

more problems than any other thing in business that I've ever had and always before I even knew they were gonna happen. So it's a bit of a crystal ball gate. It's about as close as I've ever gotten to a seeing the future tool. And it really comes down to principles in business, which is like high quality decision making. And without this, there's a massive amount of faith and hope and guessing, and that's not a strategy. So those are my sort of, I don't know, those are my closing thoughts on this Troy. What about you?

Troye (37:54.006)
And it's simple. It's super simple. It's actually and I'm going to leave. We have spoken a bunch about things, the actions that I would suggest to you if you're not doing this is really simple. Go into bank accounts for the last three months, download a CSV file, separate it out to incoming cash and outgoing cash and work out what your cash flow has been for the last three months. Just start there.

and the insights you will gain. And then from there, you start sort of thinking, what about this? What about that? And it'll trigger it off. And then your favorite LLM like Chachi PT or Gemini can really help you go to those next steps of going, how can I improve this? How can I improve that? So.

Mike Scott (38:37.323)
So, and Troy's brains work very differently, which is why this is great. I'm gonna push back hard in terms of what's valuable to me, and I'm being very clear about this. I don't really care about the retrospective, but that's my brain. It's not because it's not valuable. My brain doesn't work like that. My brain only looks forward, which is why I'm such a high anxiety person. So, I'm certainly not saying don't do what Troy said. I'm just saying it's interesting that I'm not interested in the retrospective for any other reason that it helps me populate the predictor.

So do what Troy said, but if you, like what I want you to do is do what Troy said and then start creating the forecast because that's gonna help you see where you're going. And this is really just, cause I love this riff on like how different our brains are and everyone listening to this is gonna have a different take on this. I'm really pumped about this challenge Troy. think it's, I'm glad we've given ourselves another month to refine it before we launch it. But I think it's gonna be cool because

we're gonna do a lot of the heavy lifting for people, right? We're gonna say, hey, do this, then do that, then do this, then do that. You gotta do the work, but follow this process and it'll get you into the work, which is that inertia that most people never get over.

Troye (39:49.408)
Yeah, it's the projection side of things is where things get complicated, which is why I was suggesting to people to just start with the retrospective stuff, because that's the place to start. I certainly, I mean, I agree with you, that's not where you end, but that'll just get you started. The Jedi might be doing this for a while, so he's the Jedi master level of things. But the projection forward is where it goes. But start off...

start off with going backwards and then go to play the Jedi Master work with Mike.

Mike Scott (40:24.333)
Do both and then tell us who's better because it's not a competition, but if it were I'd be winning Never okay guys and girls, that's it for today. We'll see you soon

Troye (40:27.254)
I know you are. You always do.

Troye (40:35.542)
Good luck. Have fun.