Finance · Organising to Scaling
The levers
You know the seven levers for profit and cash, you know what 1 per cent or one day is worth in your business, and you pick the lever you'll pull this quarter.
Worth reading first: Profit isn't cash yet
Does this sound familiar?
- We want more profit, so the plan is more revenue. Nobody mentions price.
- Revenue grew by twenty per cent, and there's still less in the bank than last year.
- We don't dare put prices up 3 per cent, because clients will leave.
- Clients pay after fifty days on average, while the invoice says thirty.
- A big new client wanted ninety-day payment terms, and we said yes.
Who it's for, and when
For founders and leadership teams who want more profit or more cash in the bank and mostly think about revenue. It counts from Organising onwards, once the revenue is there and margin and working capital start to make the difference. In Proving, price is already the most important lever; the day levers only start to count once serious money is sitting with clients.
The model
Seven levers decide your profit and cash. Four change your profit: price, volume, purchasing and overheads. Three only change how much money is tied up in the business: debtor days, stock days (for a service business, work in progress) and creditor days. For each lever, Miltz asks what 1 per cent or one day in the right direction is worth. That's the Power of One.
A profit lever brings in its amount every year, for as long as you keep it up. A day lever frees up money once, but that money is there straight away and costs nothing. So you don't add them up into one figure: one is profit per year, the other is cash you free up once.
Price is nearly always the strongest profit lever. Every extra euro you charge goes straight to profit, because you deliver the same. With volume, the cost of sales and the work come with it, and often extra overheads and working capital. If you want volume to beat price, you have to grow volume by many times the percentage you could have added to your price.
A lever that adds profit can cost cash. More revenue on the same payment terms means more money sitting with clients, and more volume needs more stock. A big client on long terms can swallow more cash in the first year than they earn you. Do the lesson Profit isn't cash yet first: that's where you'll see why profit and cash drift apart.
Alan Miltz, Cash Flow Story, where it's called the Power of One. Worked out in the chapter on cash in Verne Harnish's Scaling Up (2014), a chapter Miltz helped write.
Price
You charge 1 per cent more for the same thing. No costs come with it, so the whole amount is profit. The screen calculates it as 1 per cent of your revenue.
Volume
You sell 1 per cent more. Your revenue goes up, but your cost of sales and your direct labour costs go up just as fast. What's left is your gross profit after direct labour costs on that extra revenue.
Purchasing
Your direct costs 1 per cent lower: materials, goods for resale, bought-in work. Not the pay of your own people; that's in direct labour costs.
Overheads
Everything between gross profit after direct labour costs and EBITDA 1 per cent lower: premises, office, management, software, cars. Often the smallest lever, but the first one everyone looks at.
Debtor days
Clients pay one day sooner. That frees up one day of revenue once, including VAT, because that's how debtors appear on your balance sheet.
Stock days
You hold stock for one day less or, for a service business, you invoice work in progress a day sooner. That frees up one day of cost of sales at cost, once. Levers only shows this lever if there's stock in your valuation; enter your work in progress there under Inventory and work in progress.
Creditor days
You pay suppliers one day later, within what you agreed with them. That keeps one day of purchases, including VAT, in your account for longer, once. Don't stretch it past the agreed terms: it costs you your reputation with your suppliers.
Pitfalls
Giving a discount for volume
A client asks for 5 per cent off for a bigger order. With a gross profit after direct labour costs of 30 per cent, you need to sell 20 per cent more to end up with the same profit. Work that out before you say yes.
Only looking at the profit levers
If you grow and do nothing about your days, you grow your way to an empty bank account. For every profit lever, look at the cash column too.
Watch and read
The man who came up with it explains the seven levers in four minutes, and what 1 per cent or one day does for each one.
Watch on YouTubeThe same levers from the Scaling Up method, with more time on which lever to pull first.
Watch on YouTubeIn Dutch: the difference between profit and cash flow, how to forecast your cash flow and where to improve it.
Watch on YouTubeTo go further
Half an hour on the Power of One, with examples from real companies.
Watch on YouTubeRead
Scaling Up: How a Few Companies Make It...and Why the Rest Don't
Verne Harnish · 2014 · ISBN 9780986019593
The part on cash was written with Alan Miltz and explains the Power of One, with the questions for each lever. Miltz hasn't written a book of his own on Cash Flow Story. Published in Dutch as Scaling up: de groeiformule (Business Contact, 2021, ISBN 9789047015611).
View the bookApply it
- 1
1. Get your figures for the last twelve months ready
Revenue, cost of sales, direct labour costs and EBITDA, plus debtors, stock and creditors from your latest balance sheet. The Levers screen reads them from your Company valuation.
- 2
2. See what 1 per cent or one day is worth for each lever
Set everything to 1 and read, line by line, the profit per year and the cash in the first year. Write down the two biggest profit levers and the biggest day lever.
- 3
3. Work out what a discount or a growth plan costs you
Set price to −5 and see how much volume you need to get back to the same profit. Set volume to +10 and see what happens to your cash.
- 4
4. Pick one lever for this quarter, with an owner
For example: the price list up 3 per cent from 1 January, or debtor days down from 52 to 40. Make it a priority or a KPI, so it comes up in the weekly meeting.
Examples
Ready to use: the numbers for a €3m business
A building services contractor. Revenue €3,000,000. Cost of sales €1,200,000. Direct labour costs €900,000. Gross profit after direct labour costs €900,000 (30%). Overheads €600,000. EBITDA €300,000 (10%). Price up 1%: €30,000 profit, every year. Volume up 1%: €30,000 revenue minus €12,000 cost of sales minus €9,000 direct labour costs = €9,000 profit. Purchasing down 1%: €12,000 profit. Overheads down 1%: €6,000 profit. Together: about €57,000 profit a year, 19% more EBITDA. Clients pay 1 day sooner: €3,630,000 revenue including VAT divided by 365 = €9,945, once. Stock held 1 day less: €1,200,000 divided by 365 = €3,288, once. Suppliers paid 1 day later: €1,452,000 including VAT divided by 365 = €3,978, once. Together: about €17,000 in cash, once.
1 per cent on price next to 10 per cent on volume
Same business. 1% on price is €30,000. 10% on volume is €90,000 on paper. But €300,000 of extra revenue here needs an extra planner at €60,000 in overheads, which leaves €30,000: the same as 1% on price. And at 45 debtor days, €300,000 × 1.21 × 45 / 365 = €44,753 more is sitting with clients. Price needs no extra people and no extra working capital.
A lever that adds profit and costs cash
A new client brings 10% more volume, but pays after 90 days. Profit: €90,000 a year. That client has €300,000 × 1.21 × 90 / 365 = €89,507 outstanding, plus about €10,000 of extra stock, minus €12,000 that you pay your own suppliers later (at 30 stock days and 30 creditor days). In the first year almost nothing extra lands in the bank. On 30-day payment terms it would have been about €60,000.
Do this in your own business
Everything up to here is free. What you fill in for your own business, you keep in Boldcaster.
- Go to Levers. The screen opens with everything at 1 per cent or one day in the right direction. For each lever you see the profit per year, the cash in the first year before corporation tax, and the equity value after a year, calculated with the same model as your Company valuation. Move a lever up or down to run the numbers on your own plan.
- You assign the lesson to your team and see who has done it.
- The quiz counts towards your progress, and you see which lesson comes next.
Four weeks free. You'll land straight in this lesson.
Quiz
6 situations. You need 5 of 6 right. You can try again at any time.
1.Your gross profit after direct labour costs is 30 per cent. The leadership team wants 1 per cent more profit. Which lever does the most, per cent for per cent?
2.A client asks for 5 per cent off for a bigger order. Your gross profit after direct labour costs is 30 per cent. How much more do you need to sell to end up with the same profit?
3.Your debtor days go from 50 to 40. In next year's report you don't see profit go up. Is that right?
4.A new client brings 10 per cent more revenue and pays after 90 days. Your other clients pay after 30. What happens to your cash in the first year?
5.You want to use creditor days to free up cash. What's the right approach?
6.You run a consultancy with no stock. Apart from debtor days, which lever counts most for you?
Nothing is saved here. In the app, the quiz counts towards your progress.
Read next
- Reviewing your numbers every month · Every month, within ten working days of closing, you hold a one-hour review of your numbers with a fixed agenda, and every review ends with decisions that have an owner and a date.
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