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  • Peter O'Sullivan

How I found a million dollars - cash.

Well, it was not my million dollars. It belonged to a client – but they never even knew it was there. Here’s why –


  1. It required gathering information outside of their accounting processes.

  2. It required cross-functional analysis - cash can easily “hide”.

  3. It required risk analysis and operational actions – not just moving numbers.


One of the first tasks when I go into a company is to evaluate cash and cash flow. It may seem counter-intuitive, but a perfectly profitable company can go easily bankrupt. In fact, high growth can create tremendous business risk, because growth requires using cash. And if you run out of cash – you run out of company.


The Quick Checkup


The first order for anyone managing a company in distress is ensuring that the company can live to fight another day. So, before any changes are made, I need to know if there is adequate cash. In two recent projects, each company was in such a state of cash deficit, that we had to turn nearly off all payments until we could find enough cash to move forward.


And both companies were (marginally) profitable on the income statement.


I use a three-step approach to quickly determine the cash status of a company – which I will outline in another paper. Once I have verified that the company is not in a critical cash crisis, I create a plan to find the million dollars.


Where do you find your million dollars?


It is important to know that every company is different and there is no “silver bullet”. Creating profits and cash flow takes work and any number of different strategies.


That being said, we organize into three areas: cash-in, cash-in-use and cash-out. In this case, we quickly found a few areas to act on.

Do you have a good AR policy and process

(and are your customers happy)?


Take a look at your “aging” report and draw a line down the middle of it. If you do not follow a smart credit policy, you should assume that you are not going to collect anything on the right side of the report. On the left side, assume you will collect most – not all - of what you show.


Too often, managers think they will collect on all AR, but without a good process - you won’t. How good is your credit policy? Have you communicated the policy to every customer? Do you follow the policy with every payable? The key is to be honest about receivables with all your customers and to establish payment expectations up front and follow it with great discipline.


Note also, slow payments can often be a clue to poor customer satisfaction – so understanding why payments are slow is strategic, not just mechanical.


Managers often worry that this discipline will result in poor customer satisfaction. But I have found the opposite. If your staff is always courteous, professional and helpful – never threatening – your customers will respect your organization and discipline.


Are your expenditures in line with your profitability?


Next, we looked at expenditures. This can require a great deal of understanding for many companies because the chart of accounts (CoA) does not always reflect a good prioritization on how money is spent. But, there are some important techniques that will help you determine how well you are spending cash. Start with a Break Even (BE) analysis.


BE = Fixed Expenses (SG&A)/Gross Margin.


Since Gross Margin changes can be complex and require more time, we focused initially on managing SG&A. SG&A is usually the fastest area in a company to change. I have found cash in many areas including insurance, IT support and janitorial services. The lesson is, if you want to have good cash flow, you have to be disciplined about your expenditures.


Has your inventory been streamlined?


In distribution and manufacturing, the greatest cash improvements are typically realized through improved inventory management. In Services, the greatest cash improvements are in Project Management. Using “Inventory Turnover Ratio” (which is COGS/avg. inventory), we can quickly see where cash us underutilized.

We organized products by turns, sales and margins. From there we reviewed any seasonality’s or expected spikes in sales. One important note is that one can often hurt sales by reducing inventory – which is a cardinal sin. So, reviewing Reorder Points (RoP’s) and Minimum Order Quantities (MOQ’s) on a quarterly basis is crucial to streamlining inventory levels without risking sales.


(not so*) Fictional Company

$24mm Revenues

50% COGS

50% SG&A

Net Income = $0. Break Even.


AR

$2mm/month. 1% not collectible = $20,000/month.

Improve to .1% not collectible = $2,000/month.

$216,000 year in net income and cash flow.


SG&A Expenses

$1,000,000/month. Reduce by 2% = $20,000/month.

$240,000 year in net income and cash flow.


Inventory Turns

2.5X on $3.0mm inventory

Improve to 3.0X = results in $500,000 “free” cash.


$24mm Revenues

50% COGS

48% SG&A

Net Income = $456,000 or 1.9%.


While the changes only modestly improved profit line, it still created a huge improvement in cash – giving fuel to continue the improvements and focus on more profits. The results were: $216,000 + $240,000 + $500,000 = $956,000 cash. $456,000 of that is recurring every year forward.


For many companies that are under-performing on consistent revenues, attention to numbers, processes and results can often make the difference between failure and attractive profitability.


* Numbers have been changed, but the results are nearly identical to a previous client.


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