The Treasure Map explained


The perfect way to conduct a workshop with the management team or simply view your performance to define your future strategy

Use the treasure map to communicate your performance, identify the actions you should take to create future improvements with 11 numbers straight from your financial statements. Its a great way to get engagement. 

 

Enter your 3 consecutive periods of data. Remember the first 2 periods must be of equal length. 

 

Review the way you decisions have helped you improve your money making ability

 

Identify how your Wealth Creation Engine (balance sheet) has behaved. You are wanting to drive that lean, mean balance sheet machine focusing on growing cash and equity and reducing debt. 

 

Review your 5 performance focus areas

  • Are you maintaining that robust growth
  • How has that growth helped you make more money
  • Are you managing your working capital
  • how has your cash responded based on your growth strategy
  • Lastly have you created additional value  

 



Money Making Machine


Considering each component

The money making discipline 

"Converting growth into good growth"

  • Revenue

    • Is the revenue trend consistent and in the right direction.
    • Are we achieving our revenue goals
    • Are there any high growth revenue segments that we can further capitalize on
    • What revenue segment needs more love 
  • Gross profit

    • Is the gross profit trend moving in line with the revenue trend
    • compare the revenue growth $ with the gross profit growth $, does it feel good!

The money making machine tell's us how effective are we at growing and making more money at the same time

and don't forget are we doing it consistently! 

  • Operating expenses

    • Is the operating expense tending higher than the gross profit trend 
    • if revenue is trending upwards and operating costs are remaining flat this is an indication that we are delivering a scalable business 
    • Did the operating expense $ growth exceed the gross margin growth $ (hopefully not!!)
    • Is operating profit going in the right direction
  • Net operating profit (EBITDA)

    • Is the operating profit growth $ positive. (Important: If revenue is growing and you making less money, its time to rethink the strategy. Specifically if this is the case in both the most recent periods
    • Is the operating profit growth $ greater in the current period 

Wealth Creation Engine


Some still call it the balance sheet

We want a lean, mean wealth creation machine

  • The 2 wealth creation elements

    The way you create wealth is divided into how you invest and how you fund that investment.

     

    All business can only be funded by the combination of debt and equity. 

     

    Now not all debt is bad. If you are making money from other peoples money that could be considered to be "Good Debt" but if that is not the case you need to be on a rapid debt reduction program.

     

     

  • Working capital

    • Working capital comprises. Accounts receivable + Inventories less Accounts payable. representing the balance sheet items that are directly impacted by the income statement. The leaner your working capital the better your cash flow.
    • is your working capital growing at a faster pace than your revenue
    • consider the change in the working capital components. 
      • Are your customer collection days improving
      • are you improving the management of your supply chain (inventory days)
      • are your vendors helping you finance your inventories (vendor days are greater than inventory days)
    • Consider the growth in the amount of the total working capital. That's where your cash has gone to.
  • Other capital

    This is the hard one that confuses many so don't feel alone!

     

    What we have done for you is combine all the balance sheet items other than the ones you see in your wealth creation engine into one easy to deal with number.

     

    All you need to think about is if the other capital number is rapidly growing you are investing in your balance sheet and this investment is eith funded by less cash or more debt and additional equity 

     

  • Debt

    The treasure map considers debt to be the amounts owing to lenders 

  • Equity

    If you don't want to fund your investment with debt you must be in the equity building mindset. 

     

    Building equity is your best defense to fund your future growth. 

The wealth creation machine is all about more cash and more equity ... and less debt


Your Growth Story


I can grow broke or I can grow rich ...I think I know what I want

5 Chapters to your story 

  • Growth quality

    Measuring the % growth from one period to the next

    • Is my growth sustainable
    • How has my growth performed in relation to the the remaining 4 chapters
  • Profitability

    Measuring the amount of profit per revenue $

    • Is my gross profit % improving 
    • Did i grow by reducing my margins
    • My margins changed due to ...
      • My pricing strategy
      • My product mix
      • Better input costs
    • Are my margins consistent
    • Where are the best opportunities to improve my margins
  • Net profit %

    Measuring the amount of net profit per revenue $

    • Did my profit % improve if not what actions should I implement
    • How did my revenue growth impact my profit %
  • Working capital %

    This measure tells you how hungry your balance sheet is. 

     

    This measure (working capital / Revenue adjusted for the period length) shows how much working capital you are consuming for each revenue growth $.

     

    If this ratio is growing you are consuming more working capital, creating a fatter balance sheet and thus your cash flow will suffer.

     

    As a rule keep this ratio below your gross profit %.

  • Working capital cycle 

    Tells you the length of time you require to invest in your working capital. The longer the investment required the longer it takes you to collect your cash. 

     

  • Day cash collected

    This is the length of time it takes to convert your working capital into cash. 

     

    It is your inventory days (day you make the sale) plus your receivable days (how long it takes you to collect your money.

     

    Alternately is the working capital cycle plus the days required to pay your vendor. 

  • Operating cash flow

    Operating cash flow measure the amount of cash produced at the net profit level.

     

    As measured by net profit plus or minus the change in working capital from one period to the next

     

    Compare operating cash flow with net profit. The closer these two numbers the close you are to having a pure cash business. 

  • Net cash flow

    Measure the net cash consumed or generated by the business during the given time period

     

    The difference between operating cash flow and net cash flow are payment made for 

    • Capital expenditures
    • Distributions to owners for tax and other

     

    A negative cash flow amount will either be paid for by reducing existing cash reserves or by increasing debt. (or a combination thereof)

     

    Conversely a positive net cash flow will either increase cash reserves or reduce debt.

  • Value creation

    In most business the strategic goal is to achieve superior returns on the money the owners have invested in the business. 

     

    ROCE or Return On Capital Employed is the key measure to tell you how effectively  you are at converting investment into profit.

     

    ROCE measures the amount of profit per $ invested. 

     

    Look to see if ROCE is steadily growing. The rule of thumb is that ROCE should be greater than 30%  

A business that consistently improves each of the 5 chapters will be an out performing business

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