By George Isaac, www.GeorgeIsaac.com
Most family businesses are now experiencing significant revenue decreases. While some companies may be seeing volume increases, the overall impacts of the crisis are staggering. Virtually all family businesses must now adapt in order to survive.
Management teams have traditionally used financial metrics of profitability, return on investment and risk to manage their businesses. Under normal circumstances, these metrics provide companies with a sound roadmap for success. However, under current conditions, a profoundly different roadmap must be adopted as rapidly as possible.
Cash and cash flow are king
Business leadership must reorient their primary focus to cash balances and cash flows. A cash focus leads to different decisions, which are counterintuitive to many management teams.
Analysis, planning and forecasting
The starting point is a deep financial analysis of your business to determine the drivers of cash generation and cash consumption, and the timing of each by activity.
Sources and uses of cash
Define how each activity in your business impacts cash. Sales and related cost transactions have a daily effect on cash flow. Management of working capital impacts cash on a periodic or one-time basis.
1. Working capital management.
Sales and purchase cash flow cycles are a company’s lifeline. Start with analyzing your key working capital accounts — accounts receivable, accounts payable and inventories.
- Accounts receivable. Determine your major customers’ payment cycles in terms of the number of days after shipment until you receive cash. Once determined, develop strategies to shorten the payment cycle. Possible actions include more aggressive collection follow-up, faster invoicing, shorter negotiated payment terms and collection of deposits upon receipt of a sales order. The key is to bring the cash in faster.
- Accounts payable. Analyze accounts payable by similarly evaluating each major vendor’s impact on cash. Improve cash flow by renegotiating longer payment terms, eliminating early payment discounts, requesting purchase price discounts and extending payments until your supplier refuses to ship.
- Inventories. Inventories consume cash and provide minimal collateral value for borrowing money via working capital loans. Businesses should evaluate each component of inventory in terms of cash consumption — raw materials, work-in-progress and finished goods. The objective is to increase inventory turnover and sell slow-moving and obsolete inventories as quickly as possible to generate cash.
2. Debt and capital management
Immediately restructure your debts and other obligations with your banks, other lenders and landlords to slow down cash outflows.
Negotiate additional credit facilities through working capital, fixed asset and mortgage loans. Draw cash from these loans to generate additional reserves for your business.
Projects with a greater than 180-day payback should be placed on hold, unless your business is not distressed and has excessive capital. The current business environment is too turbulent to justify spending cash, even for good projects, when the time horizon for payback could jeopardize the survival of the business.
3. Sales analysis
Examine the impact on cash of significant sales transactions. There are two issues to consider: (a) Are sales generating or consuming cash? (b) Will the cash received from a sale arrive before the business must pay for the variable costs required to produce the product?
4. Operating activities analysis
Another critical step is to evaluate your operating activities to determine if they are optimized from a cash generation and consumption perspective. Analyze all major functions of your business.
The following questions are a good starting point:
- Is the operation efficient? Are there opportunities to reduce waste or improve productivity and thereby generate additional cash flow?
- Could operations be consolidated to reduce the cash requirements of maintaining multiple plants, warehouses, machines, trucks, administrative offices, etc.?
- Could a present activity or operation be outsourced to a lower cash “cost” supplier?
- Are all activities essential during the current business cycle (e.g., administrative activities)?
- Are there underutilized assets that could be sold to generate a one-time influx of cash?
- Can assets such as a warehouse or truck fleet be sold and leased back to generate cash?
Interim management reporting system
The final step is to provide real-time cash information to management to support day-to-day decision making. A typical approach is to forecast cash daily for the first two weeks and weekly for the following 10 weeks to provide a rolling 12-week forecast. Update the forecasting system daily based on new information such as daily cash receipts and disbursements.
Communication and transparency
Once management has shifted from a profit orientation to a cash flow orientation, business leadership has better tools to keep the company afloat. Proactive management of cash must become your key metric. Of course, you will need to continue to produce traditional financial statements, but your day-to-day management decisions must be driven by your new cash flow forecasting system.
With current cash flow information at their fingertips, your business leadership can better negotiate with bankers, landlords, customers, vendors, owners and others who rely upon your company’s longevity and financial well-being.
These are very challenging times. Taking immediate steps today to generate and protect your cash positions is a vital step for surviving to enjoy better times tomorrow.
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