February, 2007

Cash (Flow) is King

It’s time for owners to say, “Show me the money.”

By Bill Lee

Character and collateral are out; cash flow is in. That’s the message the banking community is sending to business owners.

One banker recently told a rapidly growing dealer: “I don’t care how much equity you have in the business, and I don’t care about the appraised value of your real estate. I want to see your business produce enough positive cash flow to convince me that you can repay [the loan] without having to liquidate. The last thing we want around here is more repossessed real estate on our books.”

 

If you look back over past columns in our industry’s trade press, I would guess that articles on improving profitability or enhancing cash flow exceed those on building a strong balance sheet by 10 to 1.

 

While optimal earnings go a long way toward easing cash flow problems, owners and managers cannot afford to ignore inventory management, accounts receivable management, and capital expenditures as a business grows.

 

Here’s a quick hypothetical cash flow for a business with $25 million in sales in 2006, and with plans to grow sales 15% in 2007:

 

Inventory in 2006     

$2,150,000 x 15%                               =          $325,000

Accounts Receivable in 2006

 $3,100,000 x 15%                              =          $465,000

 

Capital Improvements in 2007                     $300,000

Capital Equipment Purchases in 2007        $450,000

 

Additional cash required for 2007               $1,540,000

 This imaginary lumberyard will have to earn $1,540,000 or 6.2% after taxes, or around 9% before taxes. From an earnings perspective, a store manager who can achieve 9% before taxes would rank in the top 10% of lumberyard managers in North America.

 

But what options are available for a manager who only generates industry-average earnings of, say, 3% before taxes? Cash for that business will come up more than $1 million short, and will result not only in increased borrowing, but the business will also have to take proactive steps to improve asset turnover, as well.

 

So if you’re facing a similar situation, what can you do?

 

Inventory Options

Inventory turnover is the No. 1 measurement for a buyer. The first question a buyer should ask when attempting to reduce inventory without interrupting the company’s service level is,  “What am I doing with, say, eight weeks of inventory in a given category when my lead time is only two weeks out?”

Item Rank Report: This computer report begins with the fastest moving sku and ends with a list of skus that have generated zero sales over the last 12 months. A decision must be made on each of these skus with zero sales: liquidate or make marketing adjustments.

DOG Pile: How much cash could you raise if you liquidated the damaged and obsolete merchandise that has accumulated in the company’s DOG pile?

 

Accounts Receivable Options

Speed up billing: Instead of mailing invoices once a month, consider invoicing daily. You might be surprised how many customers will pay their bills upon receipt. You might also consider changing to weekly billing, since you’ll get your collection cycle off to a much faster start. Or, perhaps you could accelerate monthly billing dates. If you operate on a 25th cut-off and put your invoices in the mail on the 26th, reschedule that billing to the 15th this month and then push it up to the 5th next month. This might give your cash flow a boost.

Outsource A/R: Firms like Charlotte-based Blue Tarp Financial (www.bluetarp.com) will assume collections responsibility for 100% of a dealer’s charge customer base and guarantee payment every 30 days or every 15 days, depending on the plan the dealer chooses. BlueTarp Financial handles every aspect of a dealer’s trade credit. This includes credit extension, invoicing, and collections.

 

Capital Equipment

Beginning in 1994, I began purchasing used automobiles, largely because they are mechanically reliable and cost substantially less than new ones. The same is true of delivery equipment. Firms like Piedmont, S.C.-based Equipment Resources (www.equipmentresources.com) refurbish booms, flatbeds, forklifts, and so on, and specialize in the lumber and building supply industry.

If your cash flow is coming up short, you may want to look into implementing one of these options.