123: Alan Miltz on Understanding Those Pesky Cash Flow Numbers

What's the story being told by your cash flow? Is it a story with a happy ending? Is it a romance? Or is it a horror story, a disaster movie? So there's a story being told by your cash that can be interpreted if you'll just understand the four chapters and then the seven levers that you've got to pull to change it. Today's show is with the creator of the Cash Flow Story software and tool and I think it'll bring great clarity to your Cash Flow story. Listen in foreign. Welcome again to the Scaling Up Business Podcast. I'm your host and scaling coach, Bill Gallagher. On the show with me today is a numbers guy, right? A numbers guy who also designed shoes for a Spree. He's a South African who lives in Australia. You probably have heard of Alan Niltz before. He's the co founder of Cash Flow Story. He's an international speaker, an all around groovy guy and he's a co author of Scaling up and he's founded one of the largest banking companies that he exited, banking technology companies. So I'm so excited to have you. We're here at the Scaling Up Summit today and welcome to the show, Alan.

Thank you so much, Bill. And it's been an absolute privilege to be in Denver. Amazing speakers. I've learned so much and hopefully I've contributed as well and always happy to help the community. Yeah.

So we're going to go into some of the core ideas of your work today. Right. And we'll just go back and forth through it a little bit and help to give people a different relationship to the numbers than they have today. And I know when I do sessions with CEOs and early stage entrepreneurs, like at every single stage, unless you have a financial background. Right. You feel like you have not a very good grasp of the numbers. And even when you do, then you don't feel like you can communicate that with everybody else. Right. So whether whatever side of the I think you say it what, that we speak different languages even Exactly.

What I normally say is business speaks Spanish, the bank speaks Portuguese. It's two languages. It sounds the same, but it's different. Right. If you're a good CEO, you need to understand the language of business and you need to understand the language of a bank.

So let's talk about how you get into this world. Right. You were telling me as we started set up the mics for the show that you moved from South Africa to Australia, talk about the evolution of your career. How did you become interested in numbers? How Does a guy develop design shoes as well that comes from that background? Give us a little bit of your background.

Okay. So I graduated as a chartered accountant in South Africa. I actually started out doing medicine.

And you're going to keep it interesting for us.

It's interesting. And for many years, I really regretted for actually giving up medicine, but I went into finance and did science and became a chartered accountant and did my articles in South Africa. And I grew up in South Africa in the midst of apartheid.

Yeah.

And I never believed in the system. Nelson Mandela was in jail.

Yeah.

And I believed in equality. One man, one vote. And I thought, let me spread my wings, get an international passport. And traveling around the world.

What year did you leave?

I left South Africa in 1987, so.

A little late in that. Yeah. Yes.

So it was in the midst of apartheid. Was really living through. Living through history. You live now in Australia and you open the newspapers and nothing happens every day in South Africa. Something happened when I lived there.

Yeah.

And we all knew we had to get the best education. An international passport and a chartered accountant was the most transportable degree you could have. Yeah.

Totally.

So I traveled around the world, and by pure coincidence, I sat next to the owner of A Spree. And we were traveling from the US back to, I think it was Mauritius. I was on holidays.

Yeah.

Amazing.

Yeah.

And the gentleman's name was Michael Ford. A very famous retailer. Yeah. And I told Michael my story, and I said my family came from a very successful fashion factory in South Africa. And he offered me this most incredible job to set up Esprit Footwear in Australia. I didn't know one person in Melbourne, and I accepted the job, and I immigrated as a chartered accountant with my couple of suitcases without knowing a person.

How old were you?

I was 26 years old. And it's daunting when you leave a country you love and you land in a place that you've got no choice but to be successful. So I worked at Esprit for a few years, and then I met two other South African chartered accountants who had immigrated. And we were both doing advisory at the time. And we advised business and we advised accountants. And we realized that no one understood the numbers. Everyone looked at numbers differently. Banks spoke Spanish, business spoke Portuguese. And what we decided to do is to create a technology platform which could be used by business, banks and accountants. And we started this company focusing primarily on the banks. Yeah. And two organizations owned the banking technology space.

Yeah.

Moody's. Yeah. And S and P. Yeah. And we believe that we could do something better than both Moody's and S and P. They were both amazing credit tools. But being a non banker we said a bank doing its job should communicate to credit in one language, but to business in a language they going to understand. How do you build partnerships internally and externally? And we created the system, we got backed by one of Australia's well known families and over the next 15 years we took our system globally. Today We've got over 500 global banks who have implemented our process. Thousands of accountants and corporates sold the business about six years ago. And two of the founders, myself and Joss Milner, started Cash Flow Story which is aimed at business. CEOs, coaches, accountants to tell a story in a way that everyone will understand the numbers. The biggest danger in a business is what you don't know about your own company. And we wanted to achieve one goal, make people love the numbers, make the numbers simple and let people have or eliminate their financial blind spots. And today the company or Cash Flow story has gone global. We probably in about 40 countries, we've got about 15,000 plus users already. So it's really an amazing story and I'm absolutely obsessed to take the story to every single person I touch.

So we're going to go in depth with Cash Flow Story. Right. And in particular the Power of One exercise. I've done Power of one work with accelerator very early stage companies and also with up through public companies. Right. And it's remarkable to me how eye opening it is in different ways at every stage of the business. I was working with a public company for a while, $400 million and none of the management, except for maybe the CFO had any notion that as a profitable, quote unquote profitable business, how they were going to run out of cash. Right. Because the way that they sold wasn't spinning off cash, but was on the books anyway. Profitable. You said before, something I think we've already heard right. From the main stage. You said revenue is vanity.

Yes. So Bill, before I give any talk, I've got a line that I use.

Right.

Revenue is vanity. Profit is sanity. Cash is king. And when I see ladies in the audience, I say queen as well. But every single business I walk into, the CEO looks at their financials and discusses their profit.

Yeah.

And they think they understand the business.

Right.

And my comment is your profits and opinion. You can manipulate your profit if you really need.

I have more than one client this year that's had significant growth and they show plenty of profit but are really tight on cash. Right. And that's a problem too. There's another quote. You may, you may have heard this one before, but profit is an opinion and cash is a fact.

That's my quote as well. So thank you so much, Bill. So let me explain it so people can understand. Yeah. And the easiest way to do it is a story of numbers can be told over four chapters.

Great.

So chapter one, we all know your profitability, your revenue, your margins, your overheads, your profit. That's what every business understands.

I think every business knows it conceptually. Right. What they are. But lots of us, our financials aren't current. We don't know where we are right now. Right. The basic accounting sometimes eludes us, and.

Particularly in service companies, because most of us are service companies. The most important measure in your profit is, is to look at the revenue, which we know. Right. But what is the salaries and wages of the people generating the work? Because that's your cost of goods. Right. Or your direct costs.

Right.

And people normally just lump all the expenses together and they don't know their margin.

Yeah.

So a critical number in the service industry is to know what have you, what's your revenue and what is the cost of generating that revenue? What is your margin.

Yeah. Great. So that's chapter one. Right. The basics of profitability.

Equally important to chapter one is chapter two. Working capital. Yeah. And I simplify working capital. The only three components I look at. Accounts receivable, inventory in a manufacturing distribution type company, or work in progress in a service company. And how quickly or slowly we pay our suppliers your payables. So receivables, inventory or whip minus payables is your working capital.

So say it again. Receivables.

Receivables.

Right.

Accounts receivables plus your inventory or your whip minus your payables.

Yeah.

Equals your working capital.

Yeah.

The result of a business is cash flow. And accountants have complicated cash. But it's the most easy calculation in the world. If you start the year with $10,000 in the bank and the and you end the year with $1,000 in the bank, what is your cash flow? Minus 9,000. Right. So cash flow, by definition is the movement in your bank accounts plus your cash at bank. So every single month I ask every company to tell me what's happened to the movement in all their bank accounts. Cash at the bank, short and long term debt. And the movement in those is your cash flow. So chapter one is profit. Chapter two, working capital. The result, chapter four is cash. And chapter three is your balancing item. I call other capital.

Okay.

I do not want to confuse the non financial people in a company about accounting, terminologies, accruals, prepayments, provisions, plant and equipment. They not going to impact those numbers. So all I'm particularly worried about in a business is educating people about chapter one profit. Chapter two working capital and cash flow. Because if we want to fix cash, cash is the result of a business.

So in chapter three you're really focusing more on lumping all that stuff together or not. But we have probably both seen plenty of funny business in that area that throws your profitability in different directions.

Yes, but your non financial because we're trying to gamify a business. Right, Your business. And this is my whole message to every company. Your company is no different to a sporting event. There's got to be a score. The score of a company is cash. We then need to teach the people who work for you, the non financial people, how to play the game. And the game is played in profit and working capital. Cash flow is the result. Cash flow people need money when they grow. People also need money to fund a management team. So we need to teach your management team to play a game called cash flow gains. How do we teach them to make better decisions that they will improve their cash?

So talk to bring it to life. Right, so we're talking about concepts and important ones.

Right.

But you've worked, you have so many great stories about different companies and tell us about this applied. Right. What do we see?

Well almost every single business I walk into and a few years ago the most incredible company called me. A company in Australia. Company was profitable but they had very limited cash. They supplied consumer bills to the civil construction market. Road signs, clothing, gloves, anything pertaining to building a road or a bridge. Basic business company was growing, owner made profit but had no cash. And the owner called me in and he said please can you teach us why are we profitable? But we got no money. So the first thing I did is I did a review of their business in cash flow story and cash flow story as I said works on four chapters. So I explained to them their profitability, I explained to them their working capital and in this particular company they had good profitability but very poor working capital. The result was tight cash. We then created a culture that every person understood why is profit good cash Blad the implication was poor working capital. So what we did is we ran or we conducted a diagnostic on the company. Yeah, a four chapter diagnostic.

Yeah.

We brought in the financial, the non financial team and I made absolutely sure that every person in that room understood why we Were profitable, but cash flow was bad. And we created a one page scorecard pertaining to the four chapters. Now, what I'm going to say now, Bill, if people get this, this will change their lives forever.

Yeah.

If you understand chapter one and you understand chapter two, you can fix your company. Yeah. We realized that the only seven things a company can do to fix cash.

Right.

As a management team, the seven levers.

Yeah.

So in profit, there are four levers. Yeah.

Price. Yeah.

And volume.

Yeah.

Impact revenue.

Right.

Cost of goods or direct costs impact your gross margin. And then obviously, how do we micromanage our overheads? So price, volume, cogs, or direct costs and overheads. There are three levers in working capital. How quickly you collect, how much inventory you hold or in a service company, how quick you invoice your client, and how quickly or slowly you pay your suppliers. So we then realized that the code of a company are these seven levers. And we've called it the power of one. If you want to fix your cash flow, how many 1% or one day changes do you need to make? Because the power of one improves profit, improves cash, and therefore will uplift your valuation, which I'll explain later.

So when we first introduced this to companies, Right. First, the simplicity of just seeing, okay, there's only seven levers to pull here is helpful. But the second thing is people don't go to work on some of these small changes because they just think it's 1 or 2%. That's not. I'm like, I'm drowning here. I need a big. I need a big hand. I don't want to do a 2% change in my pricing. Right. But we see you introduce like a 3% change in pricing and your world begins to change. You tighten up your inventory, the world begins to change. You get paid a little faster, you get a little bit better terms from your supplier, cash, like dramatic changes. And in the end, we do the power of one. We see the relative value of each of the seven, and we don't work on all seven. We work on like one to three of them. Right.

Okay, great point. Step number one. People get the fright of their life when they see what a 1% change does. Cause every business of on this podcast. Yeah. Can change their business by 1% or one day.

Yes.

And you'll get a shock when you see how much that impacts your bottom line.

Yes.

I'm now going to ask a few questions to the listeners.

Okay, good.

How many of you know the difference between what does a 1% price or a 1% volume due to your profit and cash. If you cannot answer that question, you got a blind spot in your company.

Yeah.

And I can tell you about 50% of companies. I see. Yeah. Volume is detrimental to cash flow. Yeah. And let me explain why. When you, when you refer to my talk or when you listen to my videos on the cash flow story website. Yeah. I talk about three critical cash flow measures which I look at cash flow measurement number one, we've explained the movement in your bank accounts.

Yeah.

Cash flow measurement number two, what happens when you grow your company? As you grow your business, the first thing that happens is you produce extra gross margin. What people don't realize is that you need working capital to fund your growth. And in about 50% of companies I see chapter two, working capital borrows more than what chapter one gross margin produces. Yeah. So as you grow, you may make 30% margin, but you may need 40 cents of working capital to fund it. Right.

So this is the core thing. Right. Is if we could produce more with price increases, that's worth way more than the volume increase. And as your company grows, as the strategy kicks in, you are going to generate some volume. But it's not nearly as valuable as boosting the prices.

That's what I'm saying. Your non financial people are making decisions that might be detrimental to your business. Cash flow is the result of growth and management. Your marketing people might go be might be going to your customers and giving a discount to sell more. And that might be the worst strategy. And that's why in every business I go to step one, I teach people to understand the numbers then they will make better decisions. Because where do I get gains? I sit on the board of about 15 global companies. We're getting the most unbelievable results. Why? Because we're teaching the non financial people to love and understand the numbers. There are only seven levers they need to understand. If you understand your power of one, you understand your code.

So power of one and getting these seven things. And by the way, you can all go get the tools and see it all at the cash flow story which I'll remind you of before. And we'll put the link in the show notes. Tell us about another place where you applied it and what you saw there. Right.

Okay.

So example.

So firstly, this is the process I would use whether I'm a financial controller or a CEO. Again where I believe business is making a major mistake. The numbers are documented and measured by the cfo. The CEO needs to become the storyteller. The CEO is reporting to marketing operations and finance. The CEO needs to understand what advice to give to these various components of the company. And that's why when I met Vern a number of years ago, Verne did a brilliant job in doing Rockefeller habits. However, Verne realized that there are actually four decisions, people. Strategy, execution, and cash. Unless you get your cash right, your strategy can often be wrong. Unless you understand what levers to pull in your numbers. And in every single business I go into, Bill, the first thing I do is I do a financial health check using cash flow stories. Then what I do is we work out the levers we need to pull. Now, the whole of Scaling up is based around these rhythms. Daily rhythms, weekly rhythms, quarterly rhythms, every single quarter on every board, I go through the seven levers and I ask the team around the table, give me one or two changes we need to make. Because if you think about it, how do you value a company? What's the most common valuation method?

A multiple of ebitda.

A multiple of ebitda. So if you think about what does the power of one do? The power of one improves cash and puts more money in your bank account. So when you sell, you're going to have more cash. The power of one improves your ebitda. Right. By improving your ebitda, you get a multiplier uplift.

Right.

On your valuation. So if your multiple is four, when you're valuing your company, the power of one gives you a four times uplift plus the cash flow.

Yeah.

And what I'm saying to every single CEO listening to this podcast, what is your valuation today? What do you want your business to be worth in a few years time? How many power of one changes do we need to make along the route? Right.

Okay, so let's go back to that company in Australia that supplied consumables to the construction market. Tell us about applying this there.

So what we did is step one.

Yeah.

Educated the business team.

Yeah.

Then we formed this advisory board.

Yeah.

Every quarter we made sure the numbers were moving in the right direction.

Yeah.

We then set a goal. What do we want the valuation of the company to be in three years time? And the owner of the company gave me a number three years later, which was December last year, we exited the company at $100 million over their expectation was one of the great stories in Australia. And this was a company who was struggling with cash flow to a company who became outstanding in the four chapters. Now this is the other interesting thing. We speak Spanish, your bank speaks Portuguese, we talk about profit. And I'm now saying to all of you, please talk about the four chapters. Profit chapter one, working capital chapter two Other capital chapter three. The result is cash. If you understand chapter four cash, you will understand your bank who's focused on your capacity to repay. And that's why I'm saying to all businesses around the world, if you speak the four chapters, you'll be able to communicate effectively to your banks.

So what should our listeners do on the quarterly annual basis? Right? What do we need to do with our teams? What's the rhythm for every cash side?

Every three months in every business, review your profit, your working capital, your cash flow and understand your power of one. Every three months, identify one or two improvements you can make in the power of one and those become part of your quarterly rocks. Every year, once you've done your 12 months of history, enter it into cash flow story or the system you're using, understand your story and then say, what are the changes we need to make in the seven levers to achieve the next year's requirements?

So do a quarterly review of the power of one and the four chapters, right? And look for small changes to make and then, and then do a full annual review using the full input into the cash flow story.

And then say this is what we want the business to look like. How many 1% and one day changes do we need to make in the budget constraints to run next year? So we might say let's grow revenue by 5%, let's improve our margin by one, collect three days quicker and invoice the client two days faster. Those might be the small changes. And as you mentioned earlier Bill, it is absolutely incredible how small changes can have a massive impact on your performance.

You know, I'd been the CEO and executive in a range of technology and services companies, right? And then I took over an inventory based business and after a couple years of ups and downs, things like that, we had a really great year. And I'm like, wow, look how profitable I am. Okay, where's the money? My controller said to me, no, you need to loan money back to the company, right? Because we've got a big tax bill. I was like, are you kidding me?

And that's what I'm saying to people. If you don't manage your working capital, money is sitting in your customers bank accounts that should be in yours, right? Money is sitting in your suppliers bank accounts that should be in yours. Become a force chapter storyteller and I can guarantee you your business will improve.

Well she, she told me, oh the, the inventory is all there in the Warehouse and in your whip overseas. I'm like, okay, great, what are we going to do about that? So we went to work on reducing the inventory and changing the business model. Then another time we started to grow, right. Same business, but actually a high growth period. But the days payable, days receivable were dramatically different things and we needed to flip those. So we had to figure out a way to change the business model so that we were paying people a lot later in the process and we were getting paid a lot sooner so that we could fund and open up working lines of credit with suppliers. Right. Totally had to change things around. Every business we work with falls into these traps or these delusions of profitability and cash and not understanding the full position of both. Right.

And hence, if you don't manage chapter one and chapter two, yeah, you can grow broke.

Yeah.

I cannot tell you how many companies I see who boast how well they're doing and yet they're growing broke. The bank eventually owns your company.

You know, it's interesting, I think a number of folks. So for our listeners, my favorite and best teams do a full presentation from the financial side of the business using a power of one analysis along with the income statement, the balance sheet to the team at the quarterly and the annual. But not all of them do. And some of them are resistant. Like they want to keep the numbers closely held and maybe only the owner knows them. But it's very hard for the leadership team to go to work on improving that business production business model if they don't understand what's happening in the business from a number standpoint.

And that's why one of your thought leaders in your community is Jack Stack, Right. Wrote the book the Great Game of Business Business.

Yeah.

Jack uses the same analogy. Your business is no different to a sporting event. There's a score. We need to then teach our A players how to play the game better.

So we'll do another show on the great game of business before you know it. But let me say you should all go to cashflowstory.com right. And use the cash flow story tools and the power one tools there at least on an annual basis. I would do it right now and get your beginning picture. I try to use it every quarter with companies. So anything else for them?

Well, the first thing I would do, start with entering three years annual.

Okay.

And then the last three and then every quarter. Yeah. Enter the quarter's numbers.

Right.

You'll start to love the numbers. This is not about accounting. This is about enabling everyone who's non financial to understand the business, what we're.

Doing and where to go, where to make the change changes. Well thanks so much for being on the show with us today. I think it's eye opening, gives people a place to do and the next steps to getting stronger in scaling up their companies. I want to thank our listeners again for for joining us. We bring a new show like this every week on some aspect of scaling the business or scaling your leadership in the process of scaling the business and so glad to have you back. We'll be back next week with another show. You'll find us every week and you can go subscribe for updates and notices@scalingcoach.com or wherever you get your podcast. As well as scalingcoach.com, we've got all sorts of tools, guides, agendas, things like that and you can even get the scaling up book right there. If you need help finding a coach or anything like that, let us know. I can't possibly work with that many companies, but I know most of the coaches and I'm happy to help do some matchmaking and help you find someone appropriate for you or at least help you explore why and what's involved. Scalingcoach.com and cashflowstory.com thanks again. Until next time. Thank you once again. Special thanks to original growth guru Verne Harnish. This show is produced by Nye Obaid. Audio production is done by Podfly Productions with audio editing by Albert Burge and the show notes are compiled by Ayn Kodina and proofread by Tim McGowan. If you got some value out of our show today, please share it with somebody else so they too can get the value and let us know the parts that you most loved. Thanks again for listening and keep scaling up. Ra.