Running on Fumes:
Managing a Cash-poor Company
By Mark W. Sheffert
May 1999
Having trouble making ends meet? Are you just scraping by on a daily basis? In your
heart, do you fear for the future of your business? If this sounds like you, WAKE UP and
smell the cash! It’s possible to turn your cash-strapped business into a money machine if
you work smarter, starting today.
First, be honest with yourself. How well do you understand the economics
of your business? Many entrepreneurs focus on the top and bottom lines and think
everything’s coming up roses if those trends are going in the right direction. But do you
really know how much cash you have today, let alone how much you’ll have next week
or next month?
To pump life into your anemic business, you must get a grip on the ins and outs
of cash flow and make managing it your #1 priority. Start by creating daily cash flow
projections for the next two weeks, weekly projections for the next two months, and
monthly projections for the next 12 months. Break your cash flow problem into little
pieces, figure out where the deficits are, and then systematically go through the
projections, step by step, to find areas to improve it.
With cash flow projections in hand, the next step is to find more working capital.
If your current banking relationship is on shaky ground, a 90-day note is probably out
of the question. However, there are many other options from various financing
companies.
One is an asset-based line of credit, whereby you have an agreement with a
financing company for a loan up to a specified committed amount. You will be required
to provide collateral (usually short-term current assets) and the lender will charge an
interest rate that fluctuates around the prime rate and a commitment fee of 1 to 3
percent.
Factoring is another option that will generate immediate cash. It is an
arrangement where you sell your accounts receivable to a lender at a discounted rate and
without recourse to your company. You will receive cash immediately, but the discount
will range anywhere from 2 to 15 percent. For this reason, factoring is helpful for
businesses with short-term cash needs, but it is not a long-term solution.
If your business is capital-intensive with large investments in equipment, another
option may be a sale / lease-back arrangement where you sell the equipment to a leasing
company that then leases it back to you for a monthly rental fee. Your new monthly fee
should be a smaller amount than what you were paying to finance an outright purchase
of the equipment.
Now a word of caution … many entrepreneurs (known to be eternal optimists as
a group) find themselves in heavy debt situations because they believe they can sell their
way out. "If I can get a bank loan to do this project," they reason, "but find that I don’t
have the free funds flow to support debt payments, I can always sell more product to
make up the difference." But the fact is that they could be exacerbating the problem
and turning their business upside down because they didn’t pay attention to cash flow.
Next, look at ways to grow revenue. Are there any features that can be added
inexpensively to your products that will allow increased prices? Can you charge for
service calls? Bundle products and services into "new" products? Sell extended
warranties or service contracts?
The most immediate way to raise revenues is to increase prices, if the market will
bear it. For example, if unit prices are $500 and you sell 20,000 units a year, annual
revenues are $10 million. At a gross profit margin of 50 percent, the company has
$5 million in gross profit. After taking out $4.5 million in operating expenses, the
company has an annual net income of $500,000.
If you increase unit prices 5 percent and you still sell 20,000 units a year, annual
revenues are now at $10.5 million. At the same gross profit margin levels and operating
expense levels, the company now has an annual net income of $750,000. This may be a
simple example, but it illustrates a quick and easy way to generate more cash.
While you are focusing on the top line, don’t take your eyes off gross profit
margins. Find out where your value creators and value destroyers are by evaluating
margins by product category and by customer. Are you making sales that aren’t making
any profit?
One company that we recently counseled found their customers fell into a
typical 80/20 rule with only 20 percent of their customers generating 80 percent of their
revenues. So, they made the difficult decision to price away those customers who were
not contributing to profits and focused their resources on the remaining 20 percent.
Today, this company is growing 20 percent each year with 15 percent profit.
Next, examine what is going into your cost of goods sold and look for areas to
squeeze out cash. Can your labor force be more productive? Are you negotiating with
vendors to get the best prices on your materials?
Are you wasting cash in excess inventory? Manufacturing companies should use
just-in-time (JIT) inventory management (purchasing manufacturing materials just before
you need it for production) to run their operations efficiently. Also make sure your
enterprise resource planning (ERP) systems tying together sales, accounting, and
manufacturing, are talking well to each other, and get rid of surplus, obsolete, or
impaired inventory.
Can you turn up inventory turns? If you turn inventory four times a year, you
have three months worth of materials (cash) sitting on the shelf generating no return.
But by turning inventory six times a year, you’ve reduced that to two months worth!
The next area to put under the management microscope is your expense lines,
where you can do some cash addition by subtraction. A dollar of revenue may create
10 cents of net income, but a dollar of eliminated expense creates a dollar of net income.
Examine each general ledger line item for take-outs of all nonessential items.
Don’t do this alone; ask managers and employees for ideas. Get rid of subscriptions and
rented plants. Cut back on travel and entertainment expenses. Evaluate marketing and
product development programs. Reduce FedEx charges, extra phone lines, and other
non-essential services. Assess the number of employees in the company and whether you
are getting value from every position. Be ruthless. Be creative. And be innovative to find
ways to operate more efficiently.
If your business is in real dire straits, cut back on employee benefits, implement
a hiring freeze, and move to compensation with bonuses or company stock instead of
salary increases. If you explain to your employees that this is a short-term situation
necessary to save the company --- and their jobs --- in the long-term, most will go along
with you.
Now is not the time to launch a new marketing campaign, start a major research
and development project, or hire a direct sales force. Learn to make due with what
you’ve got until your business has stabilized.
Another hidden cash drain can be interest expense. Talk to your bank about
working with you on a short-term restructuring plan until you can get more cash flowing
into your business. They may agree to lower your monthly payments or even let you pay
only interest for a while.
Finally, get more aggressive in managing your balance sheet; focus on improving
receivables collections and stretching out payables. Get as many customers as possible to
pay within 30 days. Evaluate each outstanding invoice, and assign someone to contact
customers 60 to 90 days overdue. This person should have a customer-service attitude,
yet be firm and able to get a committed payment date from overdue customers.
To avoid billing disputes, be sure your invoices are easy to understand with terms
clearly spelled out. You may want to even consider a tiered program that offers a 5- to
10-percent discount for early payment.
On the flip side of the cash management coin, hold on to your cash as long as
possible when it comes to paying bills. Renegotiate terms with vendors for 45- to 60-day
(or even 90-day) terms. You won’t be able to do this with everyone without damaging
relationships or incurring late penalties, but the theory is that if you can pay your bills in
90 days and collect receivables in 30 days, you will generate two months of operating
cash.
It’s impossible to discuss every aspect of managing a cash-poor company in
this article, but it is possible to leave you with this guiding principle: "Cash is the
Lubrication of Business!" Focus on keeping more of what you have and creating more of
it. If you are able to do that, you can turn your cash-anemic company into a cash-flush
company again.
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