How much is a good business manager worth? As you analyze commercial business credits you likely wrestle with this question often. The longer you work with businesses you can pick out the good managers versus the bad ones. But, how is this measured? The cash drivers report in FINPACK’s commercial analysis tackles this question.
Cash Drivers Report
Baseball has many statistics, but a recent statistic is Wins Above Replacement or WAR. WAR is measuring the player’s total contributions or tries to answer the question “If this player got injured and their team had to replace them, how much value would the team be losing?”. In short, they’re trying to quantify the unquantifiable. This is what the Cash Drivers report is trying to do.
In the most recent FINPACK release (Fall 2018), the Cash Drivers report was introduced in the Commercial Analysis of FINPACK. This report is found in the C & I Business Analysis output and identifies the impact that cash drivers, i.e. Cost of Goods Sold (COGS), Operating Expenses, Inventory, Accounts Receivables, and Accounts Payables; have on cash coming from business growth or management of the business. An example question you could look at in this report would be – “The cash impact of cost of goods sold is up, but did management make decisions that lessened the expected impact from sales growth?”
Evaluating the impact on cash
So, how does this report work? The total cash impact can be calculated from the balance sheets. In the example below, COGS had a total impact on cash (1) of $-8,754. However, we know that as a business grows it will require more cash, so take previous year’s COGS divided by the previous year’s Net Sales and multiply that ratio by the current year’s Net Sales to arrive at what the COGS should have been if management was constant (2). In the example, that impact was $-16,709 meaning that sales growth required $16,709 more in cash. Then, calculate the difference between the actual COGS and the expected COGS to arrive at management’s impact on cash (3). In our example, management had a positive impact on cash of $7,955, lessening the impact on cash from growth.
Then, FINPACK works through the remaining cash drivers and totals the impact of both sales growth and management. In this example, we expected to use $36,385 more in cash just from sales growth, but management ended up using an additional $10,227 in cash. For more detailed information, you can review the FINPACK Help Guide by pressing F1 when previewing the cash drivers output.
In summary, use FINPACK’s Cash Drivers Report to further evaluate the ability of management for the commercial businesses you work with. This report provides many insights into the impact of cash for a small business. Is it business growth or management’s response that’s impacting cash? This helps answer the question, “How much is a good business manager worth?”.