Philip Campbell's Blog

An Updated Look at JC Penney’s Cash Flow Challenges

It's time to take a look at an updated view of JC Penney's cash flow through the lens of the Cash Flow Focus Report.

I have to admit I'm fascinated by the JC Penney turnaround story. As a longtime CFO (a good portion of which was in the multi-unit retail world), I enjoy looking in on JC Penney as they develop and execute their turnaround strategy.

Here's the first post on JC Penney's cash flow as they were going into the all-important holiday selling season. 

The Cash Flow Focus Report

As regular readers of my blog know, I consider cash flow to be the "bottom line" of financial management/understanding. And it all starts with answering this common sense question: "What's going on with the cash?"

The Cash Flow Focus Report is the tool for answering that question. (It should only take 10 minutes to complete the report.) Here is the 3-step process:

• Focus on the three largest drivers of cash
• Write a one line explanation of each cash driver
• Label each change as good or bad

 

The Quarter Ended February 1, 2014

The quarter ended February 1 included the all-important holiday selling season. Many retailers live or die based on sales in November and December.

For the quarter, the company made $35 million and cash went up by $288 million. So now let's answer the all-important cash flow question: "What happened to the cash."

I pulled up the JC Penney financial statements and completed the Cash Flow Focus Report. Here is what it looks like (amounts are in millions).

(Click here to see a larger view of the Cash Flow Focus Report)

 

The Three Largest Drivers of Cash Flow

The essence of simplifying cash flow for any company (small or large) is to focus on understanding the three largest drivers of cash for the period. It is an amazingly effective way to understand the cash flow of a company (for any period).

Let's look at each of the three big drivers of JC Penney's cash flow for the quarter.

• Reduction in inventory – inventory came down by $812 million. I labeled the change as good since you would expect inventory levels to come down after the busy holiday selling season.

• Reduction in accounts payable – accounts payable was paid down to the tune of $461 million. Coming out of the busy selling season and reducing inventory (and therefore purchasing) levels brings with it a reduction in payables. I labeled the change as good since it is logical and expected.

• Pension plan tax benefit – the company describes this non-cash item as "income tax benefit from continuing operations resulting from actuarial gains in other comprehensive income". When you look at the income statement they show a pre-tax loss of $235 million. Then a tax benefit of $270 million which creates the net income of $35 million. It is basically non-cash income that is being deducted in the Cash Flow Focus Report since it had no impact on cash during the quarter. I labeled the change as good since I am assuming the accounting is accurate.

 

Now the Next Question: What's About to Happen to the Cash?

Now we have answered the first key question: "What happened to the cash"? The next question is "What's about to happen to the cash"? Those are the two questions you need to be able to answer in your business at the end of every month.

Of course the question about what's about to happen to the cash is much easier to answer when you are looking at the cash flow results for your own company rather than a company you may not be as intimately familiar with. But we can make a few estimates/assumptions based on what we see in the Cash Flow Focus Report for JC Penney.

I don't expect inventory to move in a big way since the next quarter is not a big one.

I also don't expect much in the way of capital expenditures because the company has said they will not be spending as much there as they have in the past.

The big question is whether they can increase sales and increase gross margins in the coming quarter. JC Penney has said they expect same store sales to increase about 3 to 5%. Gross margin for the last quarter was 28.4%. The quarter before that it was 29.5%.

Looks like they have some work to do on gross margin.

 

JC Penney's Full Year Cash Flow

To give you an even bigger picture view of JC Penney's cash flow, let's take a quick look at the three largest drivers of cash for the full year ended February 1, 2014 (amounts are in millions).

(Click here to see a larger view of the Cash Flow Focus Report)

In short, they raised cash by issuing short and long-term debt. A total of about $2.8 billion. And they lost $1.4 billion during the year. Ouch!

They also sold some stock to raise about $786 million.

The good news is they have some cash on hand to continue the turnaround. It will be fascinating to see how it all turns out.

 

You can learn more about my online course Understanding Your Cash Flow – In Less Than 10 Minutes by clicking here. The course is very short and focused on helping you better understand your cash flow and put the Cash Flow Focus Report to work in your business. It's all about simplifying cash flow.

Click here to get my blog posts delivered right to your email inbox. I publish one new post each week. (Privacy Policy: I will NEVER rent or sell your email address and you may remove yourself from this list at any time you choose.)

The Results Only Work Environment

Why Work Sucks and How to Fix It. How about that for a book title?

The full title of the book is Why Work Sucks and How to Fix It: The Results-Only Revolution.

The authors are Cali Ressler and Jody Thompson. They are the founders of CultureRX, a company that helps businesses create a better way to work.

In the book, the authors talk about a concept they refer to as a Results-Only Work Environment, or ROWE.

While the title is a bit on the edge, the central message of the book is something everyone running a company should give serious thought to. The Introduction kicks off the message like this:

"This book is based on a simple idea: Our beliefs about work – forty hours, Monday through Friday, eight to five – are outdated, outmoded, out to lunch.

Every day people go to work and waste their time, their company's time, and their lives in a system based on assumptions – about how work gets done and what work looks like – that don't apply in today's global, 24/7 economy."

They say the old belief about work is "Time + physical presence = results".

With respect to the first component of the equation - "time", they point out that:

"In an information and service economy it doesn't make sense to use time as a measurement for a job well-done."

And with respect to the second component of the equation – "physical presence", they point out that:

"At some point in our lives, most of us, whether we like to admit it or not, are guilty of Presenteeism, which is any time you're physically present and putting in time, but you're not really doing your job. Your body is in the building, but your mind is somewhere else."

Results

The third component of the equation is RESULTS. The authors believe that the new way to create organizations and manage people is to focus on their results. Not on whether they work x number of hours. Or that they are physically present in a specific location when they do their work.

Which presents an interesting dilemma.

It's hard to argue that results are what really matter in the end.

But most of us have been taught to manage people based on the time they put in. And part of that approach to management is to force them to do it in a specific place so we can make sure they actually put in the time.

Maybe There's a Better Way

How would you manage your team members differently if you were only managing them based on the results they achieve?

Thinking through that question will take you down some interesting "what-if" paths!

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How is Xero Doing Financially? – Part 2

If you are not already familiar with Xero, just wait… you will. Their cloud-based accounting software for small business is growing rapidly in the U.S.

In my last post (click here to check it out), I shared an interesting look at Xero's cash flow for the six months ended September 30, 2013.

I love using the Cash Flow Focus Report as a simplified tool to peek under the hood and see what's going on in a company financially. Why? Because the ultimate financial bottom line drives from the answer to this simple question: "What's going on with the cash"?

But now let's look at some other metrics and interesting tidbits about Xero and where they are going with their cloud-based accounting software.

The Skinny on Xero

Here are a few quotes from the Chairman and Chief Executive Commentary included in the Interim Report dated September 30, 2013:

• The U.S. is now the fastest-growing region by revenue percentage and is where the heaviest investment is being applied.
• Total staff numbers have been expanded from 382 to 584 during the period.
• Xero is driving its successful accounting and bookkeeping channel approach into the US market and is automating its direct customer sales channel.
• Leading indicators such as accountant's attendance at roadshows, sales pipeline and conversion ratios are positive.
• Xero continues to build its resilient delivery platform to enable scaling to one million customers.
• Revenues grew during the six months by 84% to $30.3 million.
• Xero announced in August 2013 they were discontinuing Xero Personal.
• In New Zealand, Xero products are used by almost all significant accounting firms.
• The accounting partner channel in the US has been aggressively developed, with 25 of Accounting Today's top 100 firms moving clients to Xero and the first Xerocon US conference attracting more than 400 participants.
• Xero has 211,300 paying customers at September 30, 2013

One of the fascinating parts of the Xero story for me is it has a David and Goliath theme to it.

Intuit's QuickBooks software dominates the US small business market. But their dominance is in their desktop product. The big question is whether the QuickBooks name is so big here that people will wait for QuickBooks to create a solid online version before they seriously consider cloud-based accounting software.

Intuit recently said:

"QuickBooks Online continues to grow with a 30% increase in users for the past quarter. This presents an opportunity for CPAs, accountants, bookkeepers and ProAdvisors to help small businesses move their accounting to the cloud.

QuickBooks Online is the #1 cloud accounting solution for small business and accountants worldwide, with more than 561,000 paid subscribers and over 1.5 million users as of February 2014."

Jason Blumer and Greg Kyte, of the Thriveal CPA Network, did a great interview in February 2014 with the CEO of Xero, Rod Drury. You can check out the interview here.

First NZ Capital wrote a 42 page research report about Xero and their strategy for taking on Intuit. It's a great look at the financial side of the SaaS model.

Side note: It always fascinates me how a company can become worth billions of dollars… while at the same time losing money at a rapid clip. My brain just seems to have a hard time with the words "losing lots of money" and "becoming worth billions". Oh well, maybe I'm just too old! Click here to read the research report. It's a great look into the growth rationale.

A Note to CPAs

Here's a tip for those of you who are CPAs.

In addition to checking out the podcast, you should also take a look at joining the Thriveal community. It's an outstanding resource for forward-thinking CPAs. I joined Thriveal recently and I can tell you it is unlike anything you have experienced before in the accounting world. J

It's a bargain at ten times the price. Check out Thriveal here.

 

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Xero is Cool New Accounting Software: So How Are They Doing Financially?

Xero is making a big splash in the U.S. with their cloud-based accounting software for small businesses. The company is fascinating to me on a number of fronts:

• Their tag line is "Beautiful Accounting Software". Not too often do you here accounting software referred to as "beautiful". It begs the question: Is it really beautiful? Do business owners love it? Do accountants and CPAs love it… and do they use it? I can't wait to see how it all plays out.
• They seem to have awakened Intuit to move faster to improve QuickBooks Online. The vast majority of small businesses use QuickBooks desktop. And most of them hate the idea of moving from QuickBooks desktop to QuickBooks Online. Intuit is starting to move much faster to make their online version better… at least partly as a result of Xero breaking into the market for cloud-based accounting.
• Xero is raising tons of cash… and spending it incredibly fast. Not only are their losses growing, the losses are growing at an accelerating rate.

Being a longtime CFO, it's the "losing a bunch of money" point that fascinates me the most. So let's dive into their most recent financials and sees what Xero looks like financially.

The Cash Flow Focus Report

Regular readers of this blog know that my focus always starts with "What's going on with the cash?" I teach business owners that just 10 minutes a month is all it takes to understand what's going on with their cash flow. If they can't sit down with their banker or their business partner and explain what happened to the cash last month (in a 2-minute conversation) then they don't really know what's going on financially.

I use the same approach when I look at a much larger company and want to understand what makes them tick financially. It all starts with completing what I call the Cash Flow Focus Report. (It should only take 10 minutes to complete the report.) Here is the 3-step process:

• Focus on the three largest drivers of cash
• Write a one line explanation of each cash driver
• Label each change as good or bad

Xero Meets the Cash Flow Focus Report

For the six months ended September 30, 2013, Xero lost $17 million and their cash went down by $23 million. So the all-important cash flow question is: "What happened to the cash."

Xero is a publicly traded company (XRO) on the New Zealand Stock Exchange and the Australian Securities Exchange. So their financial information is easy to get. I pulled the financials for the six months ended September 30, 2013.

Here's the Cash Flow Focus Report for that six month period (all amounts are shown in millions – that's part of the keep-it-simple approach to understanding cash flow):

(Click here to see a larger view of the Cash Flow Focus Report)

(Click here to see a larger view of the Cash Flow Focus Report)

The Three Largest Drivers of Cash Flow

I have found that the essence of simplifying cash flow for any company (small or large) is to focus on understanding the three largest drivers of cash for the period. It is an amazingly effective way to understand the cash flow of any company. (And it's designed to pretty much fit on a note card.)

Let's look at each of the three big drivers of Xero's cash flow for the six months.

• Net loss – The company lost $17 million on $30 million in revenues. That's a big percentage of revenues. In deciding to label this either good or bad, I would normally look at the budget or the projections to see if it is line with expectations and strategy. In this case, I labeled it as good because it appears on the surface to be a part of Xero's growth strategy. The Chairman and Chief Executive Commentary in the report said "The company expects to exceed 80% growth in operating revenue for the full year to March 31, 2014 and continue to incur increased operating losses for the second 6 month period as it continues to invest". They go on to say "the Board is continuing to follow a growth agenda focused on creating longer-term shareholder value rather than short-term profitability". For better or for worse, losing money right now is part of their strategic plan.
• Capitalized development costs – A good portion of the money Xero is spending is to create the cloud-based software they are selling (and plan to sell in the future). Hard to tell how much of it is being expensed as incurred. But no doubt a lot of money is being spent on developing the software and a good portion of it is being put on the balance sheet to be amortized (expensed) over time. I labeled it as good since it appears to fit their overall strategy.
• Amortization – $3 million of those capitalized development costs were amortized (expensed) over the six month period. There is still $25 million of unamortized costs on the balance sheet at September 30, 2013 remaining to be expensed in the coming months and years. I labeled it as good since the costs have to be amortized.

Now the Next Question: What's About to Happen to the Cash?

Now we have answered the first key question: "What happened to the cash"? The next question is "What's about to happen to the cash"? Those are the two questions you need to be able to answer in your business at the end of every month.

A quick look at how Xero has been funding their net losses and software development costs gives some insight into the future of their cash flow.

In short, they have been raising capital… lots of capital.

They have raised over $250 million in the last two years or so.

In October 2013, they raised $180 million in cash. Here is how they described it:

"Xero's capital raise in October 2013 from sophisticated technology investors has removed substantial risk from the business. It is a clear signal that the company is operating on a world-class basis and ensures the company is in a strong position to continue its growth agenda".

Future Cash Flow

We can make a few estimates/assumptions about future cash flow based on what we see in the Cash Flow Focus Report and the October capital infusion:

1. They said in the report they would continue losing money… and they would do it at an increasing rate.
2. They will surely continue the software development costs. There's no business without the software.
3. They had $55 million of cash at September 30, 2013 and they raised an additional $180 million in October. That's a pretty hefty war chest that should last them a little while!

We'll see what happens when they provide their annual report for the year ended March 31, 2014. I'll update the Cash Flow Focus report and share it with you.

And there's more that makes Xero such a fascinating company and software. I'll share those with you in my next post.

You can learn more about my online course Understanding Your Cash Flow – In Less Than 10 Minutes by clicking here. The course is very short and focused on helping you better understand your cash flow and put the Cash Flow Focus Report to work in your business.

It's all about simplifying cash flow.

Click here to get my blog posts delivered right to your email inbox. I publish one new post each week. (Privacy Policy: I will NEVER rent or sell your email address and you may remove yourself from this list at any time you choose.)

Shining a Light on Your Financial Future

One of the unique abilities I've developed as a CFO over the last 20+ years is helping serious-minded entrepreneurs and CEOs shine the light on where their Company is going financially.

I love to help link their strategy and direction for the Company to what that will look like financially.

It's really easy to run a business day-to-day and spend most of your time looking through the rear-view mirror financially. So questions like these go unanswered:

• What does the future of your Company look like financially?
• What does the view through your Company's financial windshield look like?
• How long will it take to pay off your debt?
• How much cash will be generated in the coming months or years to pay down your debt?
• What does your profitability and cash flow look like by month over the next 6 to 18 months?
• If the Company achieves its growth plans over the next few years, how much more valuable will the Company be than it is today?

Once you put a well thought out financial model in place, the answers to those questions will jump off the page (or dashboard) at you.

Decision making will become more focused.

Accountability skyrockets.

Financial surprises diminish.

It makes your job as CEO or business owner just a little bit easier… and a lot more effective and rewarding.

Can you answer those questions for your business?

Click here to get my blog posts delivered right to your email inbox. I publish one new post each week. (Privacy Policy: I will NEVER rent or sell your email address and you may remove yourself from this list at any time you choose.)