Where do you look for cash in your business?

One of the top issues for the majority of businesses large and small is cash. There is never enough whether in the form of credit availability or cash flow.

So where do you look fore cash within your business? What do you really have control over that can improve cash flow?

There are a few ways a business owner or CEO can improve their cash position quickly.

1. The one that most go to instinctively is to stretch out payments to suppliers. This is a two edged sword however because sooner or later they begin to limit you ability to do business. A planned and communicated move from paying in 30 days to say 45 days can be an effective way to generate free cash in the short term.

2. The second place to look is inventory. Quite simply inventory is cash sitting on the floor of your warehouse waiting to be converted to sales. The faster you can turn inventory into sales the faster you can collect on the invoice. In my career I have seen numerous companies where this problem becomes severe, either through too much inventory or the wrong inventory resulting in slow moving sales. If it hasn’t moved, get rid of it. Even selling it at a discounts is better than nothing, Recently I met with a company that sold reconditioned components for the auto repair industry. They were about a $6MM dollar business and had a huge dollar amount of slow moving “cores”, or assembly’s waiting for repair. They “saved money” by only starting the refurbishment process after they received an order. In order to deliver quickly they had thousands of different part numbers sitting on the shelf waiting for orders, about 50% of which hadn’t moved in two years or more. They prided themselves on being one of the few companies in the U.S. that had hard to find parts. When I asked them if they were able to charge a premium for their service the answer was no. Then why do it? Their lender, who asked me to look at the business, was to say the least not happy.

3. Another place to look is at accounts receivable, simply getting paid within terms. It amazes me how many companies are afraid of losing a customer if they aggressively seek payment on what’s owed them.

4. The less obvious place to look is quality. Rework, waste, returns are a huge waste of cash. You spend money on material, labor, and time to deliver a product and you not only collect nothing for it, you generate a customer complaint. Often a second order has to be filled at an expedited rate to replace the original one.

So where do you look to improve cash flow? Before you look outside and incur interest charges, bank fees etc. you should clean up your internal issues first.

Most companies waste more cash internally than they ever realize, and because they do things the way they’ve always done them, it’s hard for them to recognize the opportunities.

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How can you create value without funding?

I read in today’s Bloomberg Businessweek Report that the chairman of the Federal Reserve Ben S. Bernanke said that small business is having trouble getting access to credit needed to keep the U.S. recovery going.

The article referenced  Bernanke attending one of the series of meetings in Detroit last month and today recalling a business owner’s comment there that, “If you thought housing had declined in value, take a look at what equipment is worth.”

It’s absolutely true of course if business isn’t growing and equipment is at a surplus banks, which are conservative in good times, aren’t going to want to lend money on it. Most of small business collateral is either in plant buildings and / or equipment. The combination of real estate and equipment values being low makes collateralization difficult.

On the positive side I just had a client refinance his term debt at a great rate and excellent amortization schedule. The load was 90% guaranteed by the USDA rural enterprise program. Which is essentially a program that is working to create jobs in rural high unemployment areas.

First the company must be “bankable” that is approved by a bank subject to the USDA guarantee. A complete package of the loan evaluation by the bank along with company financial performance for the past three years and a detailed business plan showing sales and job forecasts three years out then goes to the USDA for approval.

Credit isn’t easy to come by but there are ways to get it. A company has to have solid financial performance, a well documented strategy and credible financial forecasts to go long with the collateral.

It goes back to what I’ve been preaching for a few years now. You have to have a plan that’s documented. You have to show progress toward making your projections and goals, and you have to have a credible plan moving forward.

Collateral alone isn’t enough anymore. Banks certainly don’t want to foreclose on your buildings or equipment, they used to get 10% to 25% of the loan value in a distressed sale. Depending on the equipment that number may be optimistic in the current environment.

It really goes back to a blog entry I made a few months ago, the strong find a way to survive and prosper in a poor economy and the weak don’t.

Leaders must take steps to clarify their vision for their organizations, document it, eliminate internal waste, and look for internal sources of cash before they will be successful looking at banks as a lending source. One bank I spoke to that specialized in USDA loans said they get anywhere from 12 to 25 deals a week to look at. They can afford to pick the best deals for them.

It is incumbent upon business owners and leaders to understand that there are sources of funds but competition is fierce, and only the best will be looked upon favorably. Strong economic times allows business to become complacent, weak economies make it imperative that they learn and adjust or perish.

In today's environment you had better have value before you look for funding.If you found this article helpful you may want to download our free whitepaper, "How to Recession Proof Your Business". 

Small business planning must include health care costs.

Based on what little is known about the new health care bill that was just passed it will have a huge effect on small to mid-sized businesses. One of the line items as reported in a summary by the Wall Street Journal is that in 2013 companies with over 50 employees must provide “affordable” health care or face a fine of $3,000 per employee. (Excluding the first 30 employees). It doesn’t state what “affordable” means.

In the same paragraph it states that the insurance industry must pay an annual fee of $8 billion starting in 2013 and rising in subsequent years.

I guess it’s lost on me how an industry can pay $8 billion in annual fees and still provide affordable insurance packages to small business.

I don’t know all of the intricacies of the proposed bill. I guess that makes me about as smart as the folks who passed it, they didn’t read it either. What I do know as a mid-sized company CEO for over 15 years affordable health coverage is in the eye of the beholder.

I cannot think of a single year where our health care costs were not increased to one of my companies. Every year we scrambled to try and balance plan benefits against rising costs while trying to keep employee contributions down.

Large corporations have bargaining power and volume, and are able to secure better pricing. The small and mid-sized business owner has no such advantage. While the new plan talks about Insurance exchanges to allow small business the opportunity to shop their coverage I don’t see that as any different than what they do currently. We had to shop our coverage every few years to keep costs in line.

The bottom line of all of this is costs for business will increase, and employers will take a harder look at hiring full time employees. Prudent companies will consider health care costs in their strategic planning process, deciding whether to make investments in automation vs. full time employees with an ever increasing cost base, It will make the playing field even more uneven with countries such as China where benefits and regulation are not a concern.

Health care reform is certainly needed. It’s unacceptable that so many Americans, especially the “working poor” as they are called, are without health care. The United States spends roughly twice as much as other developed countries on health care and millions are uncovered. There simply has to be a better way. But history has shown us that a government mandated and controlled program isn’t it.

One of the chief reasons why we spend so much on health care is the cost the insurance companies and health care companies absorb trying to deal with government bureaucracy. To see government health care effectiveness you don’t have to look any further than the VA and how our veterans are treated.

The full impact of this bill on business is unknown, even by those who passed it.

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Look for cash internally while getting better bottom line results.

Every business person knows money is tight, and the credit markets show little signs of helping anytime soon. Since businesses don’t have the luxury of the government to simply print money when they need it, they have to look for more practical sources.

 

One of the least expensive places to find of cash is internal. Make sure you have tightened up internal processes and exhausted all internal potential. This source of cash is the least expensive, the fastest, and it can give you better bottom line results.

 

Where are internal sources of cash? Some are obvious and some are tougher to spot. Here are a few examples:

 

Inventory – is cash sitting on your floor.  If it isn’t moving find a buyer for it even at a discount. Utilize just in time purchases to minimize cash tied up in inventory.

 

Accounts Receivable – money is tight for everyone, allowing your customers to stretch you out makes their problem your problem. One thing I found that works well is a small prompt payment discount. Especially larger companies are open to shorter terms such as 10 days for a 2% discount. The discount is cheaper than borrowing money.

 

Quality and rework- this is a huge cash burner. Scrap must be measured and controlled. If you are buying raw materials and aren’t using them to generate sales that’s waste. You’re spending cash and not recovering any.The same is true of poor quality. If you ship and bill something and have to accept a return and reship, it’s incurring costs without increasing sales.

 

Poor performing employees – they cost the same as top performers, but don’t produce as much. Demand a return on all of your investments including your investment in people.

 

All of this is made easier by having clear and timely data to support your decisions.

 

 

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Biggest problems facing small business?

The short answer is it depends on who you ask. In doing some research for this article I literally found dozens of “biggest problems” depending on what the writer wanted to sell me.

 

There are surveys that call out numerous external problems ranging from the high cost of health insurance, taxes, government regulations, and the list goes on.

 

In my current role as a business coach I find business owners and CEO’s frequently list their biggest problem as whatever is hot at the time I’m talking to them.

 

I decided to go with my own history on this one since over the years I seem to have developed an unfortunate and extensive history of dealing with problems.

I founded a value added logistics company in 1989 that grew rapidly from no sales and eight employees to sales of over $40MM with more than 600 employees in the U.S and Europe. I sold out of that venture after ten years and bought a small HVAC manufacturing company with a small group of investors and ran that for five years.

These companies were in different industries and on different growth paths but the problems I experienced were quite similar.

Currently as a business coach I see the inner workings of many companies in various industries.

 

So what are the biggest problems facing small to mid-sized business today? My version is as follows:

 

Cash –It’s hard to get and there is never enough. If you are a fast growth company you can rapidly outgrow your available sources, if you are an underperforming company you can’t get it. The majority of companies don’t manage it well.

 

Lack of a clear plan– the SBA says that over 50% of businesses that fail don’t have a plan. I can say from my 30 plus years of experience not only is that number conservative, buy most businesses don’t know how to plan. Lack of a plan worsens the cash problem by allowing you to waste cash chasing tempting diversions, and throwing money at problems.

 

Ineffective leadership – this issue takes many forms. In my experience it is frequently in the form of depth of leadership. The founder of the company is

hands- on and effective but has little or no management depth behind him or her. This eventually causes the company to stop growing and eventually could lead to failure.

 

Sales / marketing effectiveness- this leads back to planning and leadership. Many companies have not taken the time to decide what their USP is. They try to compete in conflicting areas, such as lowest price and highest service. One takes away dollars and the other adds cost. Part of the planning process should include a very clear answer to one simple question, “with all of the products and service available to my customers why should they buy from me?”

 

Lack of execution- this may be the biggest of all. Research has shown and my own experience backs up the following facts:

·     Over 90% of strategies that are developed are never executed.

·     75% of improvement projects fail.

·     85% of leaders spend less that 1-hour per month on strategy.

·     Over 90% of employees don’t know the company’s strategy. (This is a direct result of top management not documenting and communicating it)

·     Well over 90% of organizations don’t have meaningful performance measurements in place.

 

One thing all of these problems have in common is they are all internal and within the control of the management team. Business must look internally for problem solutions and position themselves to survive in an increasingly global and competitive economy.

 

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Small Business Needs Credit Help!

Any kind of real recovery and job creation is impossible without access to credit by small to mid-sized businesses.

A newsletter from the Small Business Administration dated September 2008 provides the following interesting figures about U. S. small businesses. It says the firms with fewer than 500 employees –

• Represent 99.7% of all firms with employees.
• Employ about half of private sector employees.
• Create between 60% and 80% of all new jobs during the last decade.
• Generate more than half of non-farm gross domestic product.
• Employ 40% of our nation’s scientists, engineers, and computer workers.

In spite of that information loans are tough to get for small to mid-sized businesses.

Banks are looking for businesses that present no risk. Loans if they make them, must be over capitalized, and in nearly all cases personally guaranteed by the owner.

Even profitable small to mid-sized businesses in the U.S. have trouble getting asset-based financing using receivables and inventory as collateral.

New entrepreneurs, and even experienced business people, often ask me to help them write plans to get SBA financing for a new or troubled venture. I tell them it just doesn’t happen that way. The SBA, USDA, and most other federal loan programs simply guarantee bank loans. You have to get the bank to approve your loan first. But banks are not in the venture capital business. They want secure loans.

Every business owner or CEO must start with a vision and a well-constructed plan. Then evaluate all decisions about securing and spending working capital against that plan.

If you don’t have a clear vision, a well-constructed plan, and well-defined goals, you can burn lots of cash going down blind alleys and chasing false opportunities. That can cause you to loose credibility with your lenders and investors. Or even worse, lose your shirt!

When you need additional capital, know how much you need and exactly how you’re going to use it. With every trip to the well, you may have to pay higher costs in terms of –

• Equity dilution.
• Additional personal guarantees.
• Additional debt service costs.

Conserve your cash. If you don’t, the day may come when you can’t get any more.

Evaluate non-revenue-based activities most critically.

It’s relatively easy to calculate the return on investment for things such as new machinery or raw materials that you’ll use within thirty days to manufacture products and generate sales. It’s much harder to evaluate the ROI for overhead expenditures, such as information systems or employee benefits. But you still need to do it.

For example, suppose you’re considering investing in additional employee benefits with the goal of reducing turnover. Do your best to assess the recruiting, retraining, and other costs associated with turnover. Then project how much reduction in the turnover rate you can realistically expect as a result of the proposed new benefits. Finally, estimate how much money the reduced turnover will save you and calculate your ROI.

Look inside your organization for cash before you look outside.

Seek to free up working capital by –

• Reducing inventory. Inventory is cash on your floor. Even asset-based lenders generally won’t loan you more than 50 percent of the value of your inventory.
• Reducing rework and scrap. These soak up cash for materials and labor, but they generate zero sales.
• Retraining or dismissing underachieving employees. The investment for underperformers is about the same as for high producers, but the return is far less.
• Increasing quality. This frees up cash by reducing the amount of rework, scrap, and customer returns.

We’ve all heard the expression “Cash is King.” That’s even truer when you don’t have it and someone else does.

Over the years, I have gained (with considerable pain) a greater understanding of and appreciation for the real cost of money. One this is certain,

The golden rule: “He who has the gold makes the rules.”

If you found this article helpful you may want to download our free whitepaper, "How to Recession Proof Your Business".