Stop Obsessing Over Sales Growth for Now: Focus on GMROI for Real Cash Flow Gains!
Sales growth is often seen as a key indicator of a successful business model. Need proof? Just ask anyone who has tried to sell a business with declining sales—they’ll tell you it’s nearly impossible to extract reasonable value from potential buyers.
But let’s not forget: cash flow growth is just as critical. Focusing on cash flow, even with flat sales growth, by using Gross Margin Return On Inventory (GMROI) as your key metric, can significantly increase enterprise value for product-based businesses. Here’s how:
1️⃣ Higher GMROI = Faster Inventory Turnover
Faster inventory turnover means lower inventory levels, which directly increases cash flow.
2️⃣ Lower Holding Costs
A higher GMROI reduces the cost of holding inventory, such as facility expenses, warehouse personnel costs, and losses due to obsolescence or scrap.
3️⃣ Vendor Confidence and Payment Terms
By improving GMROI and cash flow, you’ll create a more stable business model. This increases vendor confidence in your ability to manage payables, giving you leverage to negotiate better payment terms (improving DPO).
4️⃣ Rationalize Product Lines
Use GMROI to identify and eliminate underperforming products that don’t contribute to your overall cash flow strategy.
There you have it—four steps to help sustain enterprise value even when sales growth is flat. Remember, freeing up cash flow now gives you the resources to invest in your next breakthrough product and get sales growth back on track.
If you’d like to discuss how to implement the financial planning and reporting needed to execute this strategy (or others), feel free to reach out. We have the tools and expertise to help you achieve your business goals.
More on Days Payable Outstanding (DPO) and the Cash Cycle on our website:
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Chase Morrison
Feel free to reach out with questions or if you need assistance! If you’d like to improve your GMROI analysis capabilities, click this link.
