Money Left On The Table
Follow this video to understand and utilize the Money Left on the Table (MLOT) and Keith's Big Six widgets on the main page of CFO Scoreboard:
Money Left on the Table/Keith’s Big 6
Note: The same video will be shown when the user clicks on either the Money Left on the Table widget in the big picture section of the report or the Keith’s Big Six widget in the MLOT section of the report.
Money Left on the Table is a concept CFO Scoreboard uses to show you how much incremental cash you could have generated in the current time period if your business was operating at its peak level of performance.
We do this by looking at your business’ financial history and finding the month in which a given metric’s results were better than any other month – we call this your “Best Ever” performance. We’re not comparing your business to some industry benchmark or unachievable “gold standard” – we are comparing it to your own performance in previous months and years. Your thinking should be that if you were able to achieve a certain level of performance in the past, why shouldn’t you be able to do it again?
To do this, we analyze what we call Keith’s Big Six – the six primary areas of your business you need to watch most closely.
The first three areas of your business we evaluate are the broad expense categories of: Cost of Goods Sold, Marketing and Sales expenses, and General and Administrative expenses.
The reason expenses are so important is because if you are able to reduce any of your expenses by $1,000, this expense reduction will go straight to your bottom line profits.
When analyzing expenses, we need to be aware of the relationship between revenue and expenses. Obviously if your revenues increase substantially, some of your expenses are also likely to increase…. others won’t. So it wouldn’t be fair to compare this month’s expenses to the month with the smallest expenses you have ever had because many times the months with the smallest expenses might also be the months with the smallest revenues.
To make the comparisons and analysis more useful, we compare expenses on a “common size” basis which simply means we evaluate each type of expense as a percentage of your total revenue. Take a look at the Dig Here video tutorial for more information about common sizing. Over time, the numerical or currency value of your revenue and expenses will vary, but being acutely aware of the common size trends of your expenses is critical to your optics. An expense that used to be 12% of your revenue that is now 38% of revenue is a candidate for close monitoring and perhaps corrective action.
The other three areas of your business we evaluate in Keith’s Big Six are categories on your balance sheet. Each of these three categories can have a dramatic impact on your operating cash flow. Managing the balance sheet will help your business generate more operating cash flow, and therefore cash in the bank…. which is the ultimate goal of every business.
The three balance sheet accounts we analyze are Accounts Receivable (the money your customers owe you), Accounts Payable (the money you owe your vendors and suppliers), and Inventory (the monetary amount of product you have on hand that you have not yet sold).
If you are able to reduce your Accounts Receivable, it means you have collected more money, which translates to more cash in your bank account. If you are able to increase your Accounts Payable, it means you are paying your suppliers more slowly, which translates to more cash in your bank account. And if you are able to reduce your inventory, it means you will have less cash tied up in unsold stuff sitting on your shelves and therefore more cash in your bank account.
To determine how much money you are leaving on the table in each of these areas, we compare your current performance to your best ever performance. We still need to control for the growth of your business when analyzing the balance sheet, but we can’t use common size. Instead, we use three metrics that “normalize” these three balance sheet accounts. Receivable Days tells us how many days, on average, it takes for you to collect money from your customers. Payable days shows how many days, on average, it takes you to pay your bills. Inventory days tells us how many days, on average, you hold onto your inventory before you sell it.
As an example, if the Receivable days in the current period is 38 days and if the Receivable days in your best ever time period was 26 days, CFO Scoreboard will calculate how much incremental cash you could have had if you had operated your business so that the Receivable days was only 26 days in the current time period.
In the Big Picture section of CFO Scoreboard, the Money Left on the Table analysis shows you the total amount of money you are leaving on the table. Each of these six areas of your business is represented by a colored bar. Each section of the colored bar automatically adjusts in size so that it is easy to see the magnitude of the problems. If you hover over or click the bar, we’ll tell you how much money you have left on the table in that area of your business.
In the Money Left on the Table section of CFO Scoreboard’s report, we give you more information on each of these areas, including the month in which you achieved your best ever performance in each of Keith’s Big Six categories.
Over time, your business may fundamentally change the way it operates, making the comparison to all previous time periods less useful. Perhaps you have changed your business model, entered an entirely new market, started selling a new product Comparing your current business to that old business is like comparing apples to oranges. If this is the case, you can adjust the Best Ever Starting Date from the date control in the upper right-hand corner of Keith’s Big 6. You can set this date to the month when your business changed, and when determining your best ever performance, CFO Scoreboard will not consider any financial information prior to that date.