POWER OF ONE (1%) and the 7 KEY FINANCIAL LEVERS YOU CAN INFLUENCE

In uncertain economic times it is critical to fully understand the financial performance of your company and to maintain a significant focus on both your cash position as well as your operating profit.

The Power of One (1%) is a very powerful principle that has been designed to help provide significant positive (or adverse) impact on your cashflow position as well as your overall profitability. Following this approach allows an organisation to fully understand the impact through playing close attention to the seven variables below, can have on the working capital of the company as well as the overall EBIT position.

The seven most influential and impactful financial variables to the Power of One (1%):

1. Price: You can increase the price of your goods and services.
2. Volume: You can sell more units at the same price.
3. Cost of Goods Sold ( COGS ) / direct costs: You can reduce the price you pay for your raw materials and direct labour.
4. Operating expenses: You can reduce your operating costs.
5. Accounts receivable: You can collect from your debtors faster.
6. Inventory/work in progress: You can reduce the amount of stock you have on hand
7. Accounts Payable: You can slow down the payments to your creditors

A business can leverage the power of one by quantifying the effect that a one day change or a one percent change in a particular driver would have on its cash flows.

For example, if a company is able to pay its suppliers one day later than it usually does, what would be the positive effect on its cash position?

Similarly, every extra day that inventory is lying with a business results in a negative contribution to the cash position. The impact that each of the seven drivers will have is required to be calculated and internalised by the company’s staff.

Once this is successfully done, a business will know the effect of a one percent rise in sales volume or a similar increase in sales price. In the same manner, if customers pay their dues a day earlier than usual, the exact financial amount of cash flow benefit will be known.

An analysis of all seven drivers in this manner will guide a business in achieving its goals.

Two important questions arise:

• How would your cash flow improve if you increased any or each of these by 1% over a period?
• Of these 7 key financial variables, which ones most influence your company’s cash flow?

POWER OF ONE (1%) EXERCISE

The worksheet here is to help you estimate and document the changes (1% or more) to the Seven financial variables.

We have seen extraordinary results when this is applied as part of the business's overall growth strategy, helping bring some executional rigour as well as strong financial discipline to the organisation.

If you would like a complimentary assessment of your Financial position, and for our Finance Coach to take you through the Power of One exercise using your figures to help you to improve your cashflow position as well as your overall profitability please contact us by clicking on the link and then mentioning Cashflow Story in the message box.