Interview with World Renowned Business Financing Specialist – How to Improve Business Cash Flow

business cashflow

Revenue is vanity, profit is sanity and cash is king.

This was the popular advice from world renowned business financing specialist, Alan Miltz. Most businesses tend to focus too much on driving profits, forgetting that the equally important part of running the business is to sustain cashflow.

In this short exclusive interview, we've gotten Alan to generously give out numerous tips and strategies for you to improve your business cashflow.


Alan Miltz is probably best known for developing financial analysis techniques that have become a global standard for Business, CPA's and Banks. Today, the techniques developed are being used in 22 Countries by over 20,000 businesses around the world.

In this interview, he covers...

  • How most banks assess businesses for loan applications
  • 3 biggest mistakes of what businesses make when sustaining their cashflow
  • Communicating financial strategy to the board and the executive team
  • How to measure the cash flow quality of your company? Are you funding growth or wastage in management?
  • How to evaluate the cash flow potential of your business using the "Power of One" - What are the cash flow impacts of a 1% or 1 day change in your cash flow drivers.
  • How to create a culture of Cash Flow excellence in your business
  • Should you raise money through debt or equity? 

Hello Allan! How are you?
*Good afternoon! Welcome from Melbourne, Australia. It's obviously pretty freezing today.

Let's start with an introduction about yourself. Let the viewers and listeners know more about you Allan.

*Thank you so much. I'm a South African charter accountant and I've been living in Australia for 20 years. I was initially brought by a clothing company called Esprit. I was involved when Esprit was set up in Australia and I stayed in Esprit for a few years then I was invited by the Australian government to advice textile, clothing and footwear companies because industry was changing in Australia.

Australia have to compete with Asia and I spoke to hundreds of business leaders over many years. I realized that we, CEO, accountants speak one language. We spoke Spanish and the bank spoke Portuguese. And I thought this is crazy.

About 15 years ago, I had a vision, to change the way on how world look at numbers. I created a technique which I branded optimist and my technique today is being used by hundred global banks. So, every bank in Australia, every credit application is put through my process.

I've got many of the major banks in Asia, a few hundred banks in the United States and globally we built up a business which I sold about 5 years ago to a major American banking software company.

Is it okay if you'll disclose how much you sold the company for?

*That's absolutely confidential unfortunately because we signed all these agreements and it was a very good outcome on my behalf.

You mentioned the accountant spoke Spanish, the bank spoke in Portuguese and business owners spoke in other language, English, the three parties just do not understand each other. Talk to us a little bit about it.

*Every time you speak to a CEO and you said "How's business?" they'll say, revenue is growing, my margins are growing and my profit is good. What I say to every company is "revenue is vanity, profit is sanity and cash is king."

We business speak Spanish, profit is an opinion. The banks are obsessed about the cash flow as measured by your ability to repay. So this is the problem I find. Business and banks are speaking a very different language.

Business are obsessed about profit and banks are obsessed about cash. My Philosophy is business and bank should be speaking the same language which should be about the understanding of cash flow. Except that the banks never explain simple term the way we look at the business. My very simple approach, and the approach which you obviously adopted.

A good story consist of 3 or 4 chapters. Every business, every month should be looking at the chapter 1 profit. Their revenue, their margins, their overheads, their EBIT (earnings before interest and tax). Equally important to chapter 1 is all about chapter 2 which is about your working capital. Working capital is measured in dice, your receivables or your collections, your inventory, in a service company working progress how quickly or slowly we build and accounts payable how quickly we pay our suppliers.

You cannot understand chapter 1 profit the understand cash. Cash flow is the result of profitability management and working capital efficiency. Some companies have got to check the three. They've invested in non-current assets, infrastructure, land and buildings, plant and machinery. Second summary, you've got to focus on chapter 1 profit, chapter 2 working capital, if applicable chapter 3 and the result is chapter 4. If you understand chapter 4, you can understand your bank. That's why I'm really trying to educate the world is the story of numbers that you CEO, business leader, if you want to understand your business you need to become a story teller of the 4 chapters.

What would be a good range of working capital that companies should have? Why?

*Thank you, the easiest way to explain is, if I'm a CEO, if you can't answer the following question that I'm going to ask, you got a major blind spot in your business. Every dollar your company sells, most companies, most CEOs, most financial controlist can get you the gross margin. I sold the product for a dollar and it cost me 50 cents, I'm making 50 cents gross margin. What if I'm in a service company? I sell my service for a dollar, the cost of my fee generating people are 50 cents, that'll make a 50 cents gross margin.

The equal important question, in every dollar, how much money are you borrowing to finance your working capital? The simple terms, every dollar you sell, if you don't respect or don't measure to what your collections, your inventory and the way you pay your suppliers. Chapter 2 working capital can borrow more than what chapter 1 can makes in margin. 60% of company are come across profitable but they got no cash and I can never explain it to you.

The odds are simple, every dollar you sell in the example I gave you make 50 cents margin. Every dollar you sell, you should calculate in your business. How much working capital you require to finance your business. In other words, if you borrow 60% of working capital per dollar of revenue, to produce 50 cents in margin.

Volume is good for profit but bad for cash. Companies who make wonderful margins like the legal processions you charge like a racing bull, they make a fantastic margin but their cash flow is tight. Why? The client pay them very slowly, they normally very got a high quantum of whip (work they've done which they haven't built the client) and they got to pay their staffs as they do the work. They pay their staffs every two weeks. So, what you find is however, the legal forms gain profit.

Chapter 2 requires enormous funding, chapter 2 require more funding than chapter 1 makes in margin. Where as in a construction company in Australia makes very small margins. What do they do? They have to be genius in chapter 2. Before they start the job they ask for the 80%, as they do the work, they invoice. If you don't pay their working progress they'll stop doing the work.

They pay their contractors lower than to what they collect from their customers. In other words, what's happening is for chapter 2 for couple of construction companies is very low, because they've got to become a genius in chapter 2. And I'm saying to every business, a story of numbers is not chapter 1, a story of numbers is a combination of chapter 1 plus chapter 2 working capital if applicable chapter three equals your cash.

Is there any particular ratio that you would have in mind?

*Every company is different. The whole thing is your gap between the margin and your working capital tells you how much cash you're going to generate as you grow. The bigger the gap the more the cash. I'm on a board of about 12 different companies, what I created for every business is a one page financial score card outlining the 4 chapters and every chapter is color coded god average band. Cash flow is the result of growth.

People need money to grow, but people need money for bad management. Every time you change the way you run your business, collects lower, inventories grow, bad for cash. Prices, margins decline, bad for cash.

So what you need as a CEO is a scorecard that tells you the quality of cash. Are you borrowing money to grow, because a bank will lend you money or are you borrowing money to fund a bad management? Chapter 1 plus chapter 2, your profit and your working capital equals your management team. If they run the business in color code red, you'll going to be borrow money to fund the management. So what your business needs to do is to work out what's good average band for your profit and for your working capital. And then you need to educate the organization on how to run in color code green.

What are some ways to improve working capital before going to the banks?

*Once you create and educate the staffs on cash flow. I find management teams are pretty cluey, they will work out how to fix it. Step number 1 is to create the visibility and make everyone understand the inputs into cash. 15 years I sold technology to leading banks around the world and I educate business leaders and then I realized that very few companies actually make cash flow simple. What is the solution? The solution is the 4 chapters. How do you fix your business?

The only 7 things a company can do to fix their cash. The cash flow is the result of chapter 1 profit and chapter 2 working capital. How do you fix your profit? How do you put your process up? Change your volumes, improve your margin through better purchasing, better efficiency, and utilization of people or control your overheads.

How do you fix your working capital? Collecting better, reducing infantry or building quicker and paying suppliers lower. I've created a technique called the power of wham. If you say to me, "what is the best thing you've done in your life?"

It's the simplest technique I've ever created, it's the code of a business. They're all 7 levers that should sit on every business leader's desk, what do the 1 percenters or 1 day changes do to your cash? Basically, when I sit in a board meeting, I say to the company we got a cash flow haul of 500 thousand dollars, how many 1 percenters or 1 day changes do we need to get to our strategy?

Once you got the power of 1, price and volume of the marketing people, cost of goods or your operational people, overheads is everyone, receivables is the accounting plus the sales people, inventory are operational people. Everyone got a role in the power of 1. So once you got cash problem, you say to people, we got a haul of X.

How many 1 percenters or 1 day changes do we need to reach our plan? Can you do it on a smaller customers? For example, if people got a large number of customers, I'd say to them, let's give each customer a number 1, 2, 3 or 4. You write your customers in terms of 80% in value from 20% in number. Those are the customers you never want to lose. But the smaller customers who are 80% in number and 20% in value, how do we educate them to pay our COD or 7 days and how do we put their process up? In my software company, I had 20,000 users. 95% of my revenue came from 3 or 400 banks. I would never ever supply a product or a service to a customer category 3 or 4 unless they could pay in advance. It's all about educating the customer.

Talking about paying in advance, what are the small but highly important things that they can do to get payment in advance?

*All companies has to say, if our customers will pay us in 7 days we cannot lose the customer. My comment is, if you cannot enunciate your value proposition everything goes back to pros and payment. If your salespeople cannot sit down with the customer and say to them we going to give you the best service, we going to give you the best quality products but because you're buying a small quantity we don't have the admin room to follow up a thousand customers.

We can matter to the product, we can matter to the quality, the service levels, and however we cannot follow up to a thousand for small dollar values. And hence, your sales people have got to be educated. What is the value proposition?

In other words, what is the magic in your company? If they can't explain that, then I would say, before you ever worry about finance fix your strategy.

The cost of debt is cheaper than the cost of equity all along people think otherwise. Talk to us a little bit as of why is it cheaper?

*Firstly, I always relate it back to my own experience. I've had a number of startups which have gone to major maturity. The biggest mistake I've ever made was using an equity funding into my business. What I the reason why? Firstly, it's very difficult to get an equity funding.

Only about 5% of applications were successful. Again, in the formula I used, you will only be successful in raising professional equity, venture capital or whatever. If you could prove that your company is a mover. What is that mean?

M people will look at your management team, you got to explain that you have a management team with an impeccable track record. O stands for you opportunity. Say, I'm going to invest to you, I'm looking at you and your management team.

I'm saying to you, "Tell me about your opportunity. Prove to me that it got a lot of blue sky. Prove to me that it has a high barrier to entry. And prove to that you do something that makes you unique and special." Management plus opportunity will indicate valuation. If you believe your value is 10 million and someone else says your value is 2 million.

It's a max of gap and it's very difficult to do the deal. But if you say it's 10 and someone else thinks its 7, then there're many techniques to bridge the gap. E for mover stands for the Exit strategy. If ever you're going to get someone else's money in, you got to tell them how they can get their money out of your business. Every business I start-off, I always say to myself upfront "How am I going to exit this business one day?

Who's going to buy this business? How do we need to package this business that has been available for sale?" And R stands for the return of investment. Equity is the most expensive form of funding. If you are a start-up business, in Australia people are looking for a return of 50% per annum in a start-up. It doesn't mean you have to pay them every year.

But when it means you sell your business you will triple your money every 2 and a half years. If you are going concern you are looking at a 30% return per annum. This is only why 5% of company get successful in raising capital because how many companies are a mover?

And I'm saying to every business, if you are not a mover, you should become a mover. Because whether you're raising capital or run your business as if you're available for sale. Why do I love banks? Banks never own your business.

Yet, it's a very inexpensive form of capital. So, what I suggest to people, do it slow. Because the one thing about professional investors, they normally invest in a portfolio of a backfill companies. So all those tips, probably 2 are going to hit blue sky, probably 3-4 will do very little, and the rest will fail. Because they want you to scale up and they want you to hit it very quickly and do well. I prefer to control my own destiny.

I don't like, because what happens to most of the cases, you start the business and you're one of the first 5% to raise the capital, a year later you have a strategy meeting of your investors and they say we are a very happy but things are getting slower than what we have thought. And you bought the money which they have put in the first place. They may give you a second chance, so now we diluted to the second time.

6% of the next strategy meeting and you burned their money again. Because things are going well, but going slowly. So now, a third charge of capital is raised, the meeting is held without you in the room. And the investors say, we love the company but the founder is not a leader, let's find a professional CEO. And before you know what hits you, you become a minority shareholder and you become an employee reporting to a CEO in the company you founded. And that's why what I say to most business start-ups, step 1 is obviously get your strategy right.

Try to raise money as much as you can from family and friends, the goods lower and get the bank on the side. Because you're going to control your own destiny and you're going to have a much nicer over driver will be part of the 8 out of 10, if you had a bad experience, we don't go to that experience. I don't like playing the odds. That why I called everyone, understand cash flow and you'll understand the banks. I love the banks.

For many businesses, especially in Singapore, when they bring the business over to the banks maybe for some reasons the banks won't fund them money. And then they start looking for other options. Maybe they don't come from a very rich family or they don't have enough friends who can lend them but it's also well. A lot of other alternative financing can come into them, evaluate their model then fund their growth as well from there.

*Exactly, in Australia for example, there are 50 plus lenders. There are a lot of niche market lenders. You are not the traditional banks, you will fund your supply chain, you will fund your working capital growth, so there are many non-traditional banks that you can work with to actually fund your growth. Because, obviously we come from different regions. I don't want to give examples of different bands. But I'm sure in Singapore has a very sophisticated market and understanding the supply chain money.

Yup, that's true and it's one of the last few questions out there. In business taking own launches good debt and as well as this bad debt. Talk about us the difference, what makes a good debt and what makes a bad debt? Do you have some stories or some examples to explain those two?

*I'm going to explain a bit differently because I always read the head of a CEO. Cash flow is the result of growth and management. So the first thing I do when I got in a company, I say, "Let's look at your financial in one second." Funding equals operations, that's what a balance sheet is. Accountants just make it bloody complex.

Funding is either through debt or through equity. To finance your business is either your money or the bank's money. What are you funding? The working capital and the other capital. So what I'm saying to business, when I'm going to have a major problem when you CEO are borrowing money from a bank t fund bad management.

So if I'm looking at a company and it get its 10 million, what I want to know is how mush have you borrowed to grow? How much you borrowed to finance power in changes to the wrong direction. In other words, if you look at the profile of this company, and their collection day is on 19, and their collection date should be 16, they are borrowing 30 days of power of one in efficiency in the others. If their inventory is set in 120 days and it should be 19 they got 50 problems of power of 1 in the inventory.

If your margin is too low, once you know your power of 1, the power of 1 is your code of business. The power of one fixes your cash. The power of 1 fixes your profit. By fixing your profit the companies are value by profit multiple. The power of 1 not only fixes your cash, it fixes your profit and it give you a multiply uplift on your valuation.

That's why I'm saying to every CEO, good debt, bad debt, I use the term "How much have you funded? Bad management vs. the growth that you should have funded. "And the once we know the quality of your cash, we can then work out strategies. To have power of 1 improvements to reduce your debts which is exactly what you did to your business.

If people want to know how to fix their financials and learn the color code, where can they get those information?

*The best software tool in the world for business is so simple is there's the power of 1 in it, very simple tool or people can email me at