The Benefits of Revenue Linearity

"Through improved revenue linearity and strong working capital management, we improved DSO, decreased inventories and, as a result, generated $46.8 million in positive operating cash flow, our 46th consecutive quarter of positive operating cash flow."

Chairman and CEO Robert Hagerty, Polycom Inc.

Many companies measure revenue on a monthly basis and overlook the "flow" of revenue during the month. In some cases companies are captives of their customers as it relates to the demand curve that they place on them. We often receive promotion offers to order by . . . which are designed to improve the linear flow of revenue for the company. In other instances, companies do not apply sufficient planning(forecasting)/control to the manufacturing process which can result in a hockey stick flow of revenue at the end of the month. This can be particularly true for build to order products versus those that are more commodity oriented. Insufficient order backlog can also produced a non-linear revenue flow as manufacturing will produce products for potential orders that do not arrive until late in the month placing extreme demands on operations as they do final assembly, configuration and test to ship by the end of the month.

Why is linear flow necessary and valuable to the financial performance of the company?

Revenue Linearity Example: Ideally if you have a monthly revenue budget set at $1.2M and there are 20 working days in the month then a linear flow would be to deliver to finish goods and ship $60K per working day.

This example assumes that there are sufficient orders and customer approved ship dates to ship available inventory each day at a $60K rate. This linear flow allows the collection process to begin earlier than if the bulk of the $1.2M is shipped the last week of the month. Also, inventories and work-in-process can be optimized to support a $60K/day flow instead of a large "burp" the last week of the month (in some cases this could occur over a few days).

By the end of the first month or by the 15th of the next or second month a good portion of the cash from the first part of the month would be received or on its way. A non-liner flow would push many receivables out into the third month putting pressure on working capital and credit lines.

The graphic below highlights the difference in collection is a linear and non-linear revenue pattern. In the Linear example the first collections are on their way by the middle of next month and would continue to increase as the each receivable aged. In the non-Linear example we see a substantial portion of the receivables delayed and additional 15 days or more depending upon the severity of the non-linearity. The cash is delayed but demands for cash regular wages, utilities, inventory for the current month revenue still exist and would have to be paid by reserves or a draw on the credit line.

When build-to-order products are involved the scheduling and production performance are critical to produce the linear flow. Lean manufacturing methods have improved the ability of manufacturing operations to meet scheduled delivery dates that also support linear revenue flow.

In the case of Polycom above, it improved revenue linearity along with strong working capital management and produced an attractive positive operating cash flow.

What is your linear revenue strategy? Are you taking advantage of revenue linearity to improve cash flow in your company?

Cash Flow Planning and Profits

Cash Flow Planning is something that many companies do not integrate with the normal budgeting and profit forecast process. For some companies this is not a serious problem in a "normal" economy as they have sufficient cash reserves or credit line that can absorb the normal ebbs and flows of cash demands of the company. In todays economy where cash reserves have been depleted or credit lines tightened or "lost" raises a new demand for "accurate" cash flow planning.

If I make a profit then whats the big deal about cash flow? Profits on most company financials do not represent cash but a sale that is a liability on the customer to pay at some time in the future. Until the customer pays the company uses working capital to pay for inventory, employee wages, heat, lights and other expenses. It is the management of customer payments and company obligations that results in either positive or negative cash flow.

Isn't it just a matter of making sure receivables are greater than payables - right? This would be a simplistic view of managing cash flow as this attitude would most likely not recognize factors that influence the changes in Days Sales Outstanding (DSO) or balancing non-uniform demands for cash such as new products, tax payments. capital expenditures or debt reduction.

DSO is a measure of the number of days that a company takes to collect revenue after a sale has been made. Why would DSO vary?

1. Products that have quality issues and do not operate properly will cause payments to be delayed until the products perform.
2. The customer mix changes where the majority of customers paying in 45 days days may transition to customers who push payments out to 60 days - or more.
3. Customer cash flow problems can filter down to you where they may delay payments to improve their own cash flow situation.

So if I do a good job on collections cash flow can be managed? Managing the inflow of cash is important but it is also critical that you look what expense and asset strategies you are using in the company. Such as:

1. Carrying inventory that is not being used consumes cash making it unavailable for other purposes such as paying wages, lease payments, etc. Excess inventory can even result in lost cash if the inventory becomes absolute and is written off - thrown away.
2. Capital expenditures such as equipment or buildings consume cash prior to getting a return on the investment. Timing of investing in capital expenditures can put positive cash flow at risk.
3. Factory cost or the cost of goods sold - labor and material - will put pressure on cash if productivity and quality objectives are not kept to insure that a dollar of sales will yield a predictable gross margin. Loss of control in labor cost, productivity, quality or material cost can create products that cost more than expected and/ or delivered later that expected resulting in a cash flow crisis.
4. Vendor financial stability can become a problem where they may need to tighten their collection policies which may require you to pay early if there are not otters sources for the same product or service that will let you pay on the same schedule you have planned into your cash flow plan.

Summary

Good cash flow management is not an accident. Intentional action is required on a regular basis to make sure that all of the factors that support your cash flow plan are in order. Cash is king - but you have to take a proactive role with your organization to make sure you achieve your cash flow objectives. Integrated cash flow planning is essential. Developing cash models of your business will help you and your team understand the sensitivity of your specific business model to factors that can cripple or impede good cash flow management.

Are you Managing or Leading?

I am passionate about the four key elements that I feel are critical to running a successful company. These elements are Leadership, Process, Metrics and Organized Financials. The cornerstone of this four-step methodology is Leadership. Do not use confuse this with the term "management" or "managing". Leadership involves inspiring others with a clear vision of how things can be done better. Those who manage tend to implement someone else's vision or what they believe is the "corporate" vision and normally slow things down by limiting what their part of the organization can do to just what has been asked or expected - to play it safe and no more.

Leaders work between the lines and interact with their organization to test their vision and assumptions by getting feedback from those who actually work in the operations they are responsible for. Taking the time to understand what is holding people back from higher levels of job satisfaction and job performance. Leaders try to find out how the employee can be unleashed to higher levels of performance than they thought possible and then get out of the way. This is true for individual contributors and those in intermediate supervision positions as well.

Too often artificial ceilings trap employee performance because of misunderstandings, poor vision implementation and access to the facts that drive the business. The Leader looks for this condition and gets to the bottom of the problem. Few people intentionally perform poorly when provided with reasonable training, equipment, work environment and motivation. The leader is conscious of the whole picture and looks beyond the traditional boundaries to see that his business (or department) is successful and that their employees are excited about what they are doing and are onboard with the direction of the business.

Have you trapped yourself into a "manager" mindset? Are you excited about your business? Are you transferring that excitement to others in your business? Can you recognize that excitement in those who produce your products or deliver your services. Take a fresh look at your business, take a new look at your business plan (even better - develop one), identify what is necessary to energize not just your key people but all employees. Become a facilitator and less a controller. Celebrate the independent accomplishments of employees and supervision when they do well and lift the performance of the team(s).

Be a leader!

WWDD: What Would Deming Do?

"No one has to change. Survival is optional." W. Edwards Deming

Several lifetimes ago (1983) I attended a 3.5 day seminar in San Diego and joined over 300 people from various manufacturing and service companies to listen to W. Edwards Deming. Deming is attributed to be the father of the evolution of manufacturing in the use of statistical methods to manage business processes and the attitude of continuous improvement.

We all sat at narrow tables in a large ballroom with Deming on a raised dais. We were equipped with a full 3" binder that contained a Xeroxed volume containing his many lessons on how to apply statistical methods to solve business problems and improve product performance. Deming was not a gifted speaker but his stories and anecdotes were riveting and despite the size of the group few people left early.

Deming did carry a chip on his shoulder since he had not, by then, received recognition in America for what he had done in Japan. Others, American based statisticians, were claiming ownership of the movement but it was clear that Deming had fostered a miraculous change in post-war Japanese industry that resulted in significant inroads in American markets with lower cost and higher quality products. In the early 80's it was clear that American companies were waking up to what they had to do to just catch up let alone get back in the lead.

What Would Deming Do Today? American industries have gone a long ways in implementing the the following Deming philosophy into their business.

Deming would evoke disbelief in his management seminars when he insisted that 94 percent or more of all problems, defective goods or services came from the system, not from a careless worker or a defective machine. He would go on to say that to improve an organization’s goods or services, the system had to be improved rather than searching for the guilty worker or broken equipment.

In almost all cases, when top managers implemented his ideas, they were surprised to find that they agreed with him: The management and the system they were managing were the true source of both problems and improvements.

However, in today's economy we find an increasing presence of government in business in terms of regulation, company ownership and increasingly complex taxation and fee structures. What role should government take in adopting the Deming philosophy as it becomes inextricably involved with the ability of business to operate in the free-enterprise marketplace. Can government, a body that sees some form of leadership change every two years, plagued by lack of accountability, has many political appointees that are not carefully recruited and placed because of their ability to perform in their jobs, has extreme difficulty in managing itself (post office, budget deficits, perks) let alone managing profit based organizations?

Successful adoption of the Deming principles begins at the top of the organization. It requires a constancy of purpose, breaking barriers between functions, driving out fear as the common denominator for change or performance, elimination of slogans, exhortations and targets and a solid understanding of the processes that they are managing. This is a tall order for a government process that consistently demonstrates an inability to be accountable to its citizens and other stakeholders for the management of basic services.

What would Deming do? He would get government out of the business of managing business.

Sailing with Martin: A Management Example

I recently had the pleasure of sailing in a sail boat race on Puget Sound at the invitation of Martin who runs a local high tech manufacturing company. It was a beautiful fall day with sun and plenty of wind for sailing. As a precaution I dressed for rain - the normal weather for this time of year. The boat was 42' long so it easily accommodated the onboard crew of 5. To be competitive in a race, the crew has to efficiently respond to changing conditions such as weather, water (current, depth, tide), proximity to other "vessels" and to effectively execute ship board maneuvers necessary to keep the boat tuned (trimmed) to the optimize its sailing characteristics.

Martin, who has extensive competitive sailing experience, was the captain. Sailing is a passion for Martin and the boat is his love. What makes Martin different from other experienced sailors is his ability to manage the multiple activities of processing the external factors affecting the boat - wind, current, etc. - and the onboard operations - steering, lines, sails, etc. and then effectively communicate what he needs to his "experienced" crew to perform. Of course this is all done in a foreign language that relies upon unusual words: leeward, sheets and stays, spar, weather, tack, jibe, luff, halyard, helm, guy, pinch, reach, backstay, about - to name a few key words. It is one thing to watch "Master and Commander" on TV and hear these terms and watch others understand what to do but another when you hear them thrown at you assuming you know what to do when the boat is under way, healed over, rail in the water, and everyone is moving fast toward their assigned job. As a novice I found myself often saying "Huh?"

Martin is in his element when the boat is under sail. He is constantly checking the trim of the boat to optimize its speed under the current heading. Is the mainsail right, could the foresail be tighter, is the helmsman falling off the wind or pinching too much, are the lines set for the next planned maneuver, what is happening to the boats ahead and what does that suggest will happen to him, what is the current depth, how fast is the current adding to or taking away hull speed, are we on course for the next turn? Martin is constantly in motion "managing" the boat to be as successful as possible under the prevailing conditions. His boat is not the youngest in the race and does not have a lot of the hot-technology equipment that many of the other boats have but Martin makes up for reasonable handicaps using his sailing savvy and tenacious sailing skills to be competitive.

How does this experience apply to business management? The similarities with running a business are striking. We are constantly buffeted by either known or unknown market factors that can affect your ability to navigate your business through uncertain business conditions. While you cannot control the unknowns you can address the "knowns" of your business to improve your ability to "weather" the storm successfully. In order to do your job well you find a way to constantly get a "bearing" on where you are in terms of your sales pipeline, your ability to keep your operations "trimmed" to operate at optimum profitability, how effectively you are communicating within your organization so that all know what to do and when to do it, be aware of market conditions and familiar with how the rest of the market is performing and what changes you need to make to perform better.

I have known Martin for many years and while I do not have a detail knowledge of his business management skills I do know that his industry has undergone stress and he has successfully "navigated" his company through troubled waters to profitable performance. I am sure his sailing talents are at work in his business office.

There is a lot we can learn by observing others in personal pursuits such as sailing and how we can apply those lessons or impressions to our business practices. While there may be obvious differences between businesses and industries it is amazing how common the skills and strategies are to managing successfully.

Are You Average or Good?

"The average organization when someone asks when you want something, they pull out a calendar, but in a good organization, they look at their watch and we really got to get that way." General Stanley McChrystal, US Army

Many of us will never confronted with the challenges of General McChrystal managing the war in Afghanistan where procrastination and delays in taking action could be measured in lives lost. However, as business leaders we are engaged in battles that are fought by our organizations each day. Successful outcomes of major or minor engagements is often a function of the sense of urgency that key people apply to each situation. We have all heard the proverb "For want of a nail, . . ." where permitting a small undesirable situation will allow a gradual and inexorable worsening that in business results in lost business, margin erosion, lower profits, marginal quality, etc.

What is the answer?

As the leader of your organization you are responsible for setting the example and leading the way. Here are some questions that you should try answering which will indicate how effective you are in promoting and modeling a sense of urgency in your organization.

• When something needs to be done do you search for your calendar or look at your watch.
• Do you put off until tomorrow decisions and actions that could be completed today?
• How hard do you fight throughout the day to make sure you make your commitments or re-prioritize as soon as it becomes obvious that a targeted task can not be completed, set a new date and communicate the change to those involved?
• Are you able to transfer the excitement that you feel for your work to those around you so that they become individually motivated like you?
• Do you publicly recognize those who are demonstrating a sense of urgency in their individual jobs or as teams of people?

Summary

Urgency as an end all is not the answer. Working is a highly urgent mode for too long can create stress and lead to job dissatisfaction. Too many urgencies is an indication of a fundamental problem in the organization that needs to be addressed.

The key lies in knowing when and how to respond to demanding conditions accordingly. Hopefully putting the right people in key positions, providing adequate training and operating procedures and support infrastructure will help everyone work effectively. An organization that adopts an "urgent" profile by doing the above, leader included, will find it meeting or exceeding customer expectations on a regular basis.

Apple Support: A Life Saver

I recently did a no-no on my quad processor Mac Pro that I spent weeks adding software and configuring. I will not bore you with the details leading to the incident or complexity of the mess that I created. To say the least I thought all was lost. I looked toward a discussion forum that in the past had provided good advice and direction in dealing with much smaller issues. But this time no cigar!

I happened to notice a new feature on the Apple Support page which promised that you could speak to an expert. My first impression was how much that would cost but I was desperate by this time as deadlines were beginning to press in on me. I clicked on the link and within a few pages, which collected information on my circumstances, I was at a button which said that talking to an expert was just one click away and that they would call me in one minute - right! I was game. I had not been asked for my first born yet (she is now 36 and a lawyer so they would have had a real problem) so I clicked . . . and in approximately one minute my phone rang. An auto dialer then asked me to wait while it connected me and I expected to then enjoy the traditional, too loud, music typical of support calls. Seconds later I was talking to a very competent and professional technical guy who handled the knowledge of what I had done to my machine in a non-condescending manner. Between the two of us (more him than me) my machine was brought back to life. I was able to discover that I had not completely shot myself in the foot and I was able to get back to 99% of where I was before my incident.

I still have some cleanup to do but it looks like the overall integrity of the machine is sound, I thanked the professional voice profusely and my day improved dramatically.

Thanks Apple Support!