B2B CFO^®    (877) 4-B2B CFO

"Cash... we help you get it."  It's the B2B CFO slogan and we like to think it's a "twofer" slogan.  We help you understand cash flow and why it's important, and by improving every aspect of your company's financial performance we make you a better candidate for investment and loan financing.

So how do you understand cash flow? Let's take a look at seven main drivers of cash flow:

1. Accounts Payable and Cash Flow. Every business relies on suppliers and trading partners to provide goods and services, without which we could not serve our customers. When we purchase goods and services we typically buy on credit with a pre-determined set of payment terms. When payment is due, we use cash to settle our debts. The faster we can receive and transform purchases into our own products, the faster we will have finished product to sell to our customers, which ultimately means cash in our door. We need to focus on : 1) reducing supplier order-to-consumption lead time, 2) reducing work-in-process inventories and 3) optimizing use of credit terms with suppliers.
2. Accounts Receivable and Cash Flow. Accounts receivable is a significant driver of cash flow. In fact, your outstanding day’s receivables can often be the differentiating factor of the company’s fiscal viability. Remember, cash is the life force of your business. In fact, it is wise to make all salespeople responsible for collections in addition to selling products - or at least commissioned on collected sales.  Our ultimate goal is to receive payment as quickly as possible after we make a sale. Key to this outcome is delivering the perfect order. The perfect order will provide the customer with the right product at the right place at the right time and in the right quantity and condition, thereby encouraging the customer’s prompt payment. Areas of focus should be: 1) deliver the perfect order every time and 2) reduce days sales outstanding by aggressive management and follow up.
3. Revenue Growth and Cash Flow. Many management gurus have argued that the only purpose of a business is to develop a customer. The logic here is that without a customer there is no business proposition. However, some customers are better than others. Therefore, it is important to understand that cash is generated from good customers. Increased revenue from good customers will result in increased cash flow. Try to: 1) identify “good” and “bad” customers based on the profitability of individual accounts, 2) retain current customers and develop new, profitable customers to generate increased cash flow, 3) reduce inventories to become more cost competitive and 4) credit qualify new customers and existing customers periodically.  And growth can sometimes be bad.  Unless you know your sustainable growth rate, you run the risk of out-running yoiur cash capacity.
4. Gross Margin and Cash Flow. Gross margin is generally defined as net revenues less cost of goods sold. Gross margin is the first line of profit contribution that the firm will see from operations. The larger the gross margin, the more gross income we will have to contribute to corporate overhead and profitability. This will result in cash generation (after dealing with collection). To increase gross margins, we need to ensure that our variable cost curves do not grow proportionately with our revenue curves. That is, we need to be able to generate increased revenues without a one-to-one increase in cost of goods sold i.e. doing more with less. To reach this goal, we need to focus on the activity drivers of cost of goods sold. Action items would be to: 1) reduce overall supply chain and manufacturing lead times and 2) reduce work-in-process and raw material inventories in order to reduce inventory carrying costs and therefore reduce overall cost of goods sold, 3)Analyze profit contribution by product, territory or other classification to eliminate areas that do not contribute fully.
5. Selling and Administrative (SG&A) Expense. Although not all companies call it the same thing, Selling, General and Administrative (SG&A) expense is the most common term used for corporate overheads. Reducing the corporate overhead burden will result in increased cash to the bottom line. Substantial operations activities and costs are often rolled into SG&A. Unfortunately, many of these activities and their costs are regarded as necessary evils—merely costs of doing business. In today’s business climate, where 1 percent of sales can mean the difference between viability and bankruptcy, these supply chain operations represent a key area of concentration and, perhaps, means of competitive differentiation. To achieve advantage, the company must: 1) improve internal processes and reduce SG&A expenses ultimately to increase cash flow, 2) bid out expense categories frequently 3) reduce finished goods inventory.
   
6. Capital Expenditure and Cash Flow. Capital expenditures are a good example of how cash flow and accounting income diverge. For example, if you purchase equipment for a $100,000, you may decide to outlay $100,000 in cash to close the purchase, or finance the costs with a loan. But, the cost of the building will appear on the income statement as depreciation expense over the useful life of the equipment. The first month’s accounting might show just $1,500 in depreciation expense, but a $100K has exited the cash drawer. Capital expenditures can be an immense drain on cash and have to be part of a long term plan. How do we know if we are making the right decision?  Capital expenditures can drain our companies of cash that can be better used in revenue-generating activities. Buy vs lease or outsource become critical cash flow decisions.  Can we: 1) reduce reliance on fixed assets and allow cash to be used on revenue-generating activities and 2) focus on reducing inventories as opposed to building more warehouses for inventory, 3) Share or outsource capital needs 4) Lease finance equipment to synchronize cash flows.
7. Inventory and Cash Flow. Inventory can be the most perplexing of all the cash drains because everything about inventory is counterproductive. For example, inventory on the balance sheet is a current asset. But inventory sitting in a warehouse consumes cash, detoriates and "shrinks" and can be difficult to liquidate (while ease of liquidation is a pre-requisite to being a current asset). So, we could argue that inventory is, in fact, a liability. Further, to store and move surplus inventory drains cash from the business. The third and arguably most significant point about inventory is that inventory itself is visible, but its costs and cash impact are not. Although we can walk the floors of our facilities and see inventory, we cannot easily go to our financial statements and determine how much cash is being consumed by this inventory.  In addition, there is an implicit opportunity cost when money is tied up in inventory and the space used to store that inventory. Any way you slice it, inventory consumes cash. Consistent, high-performing processes call for less inventory to back them up. We should, therefore, try to: 1) eliminate inventories and conserve cash and 2) gather the data required to calculate and articulate the cost of carrying inventories 3) enact controls to minimize holdings and 4) work with suppliers to reduce lead times.

Cash Flow in Your Company

So...do YOU get it?  Cash is king! To be competitive in today’s market, we need to manage cash like the life force of the business that it is. Alone, each of these seven cash drivers acts independently. Together, they form the organization’s cash cycle. This cycle must be measured and managed in order for a business to reach its potential. Sophisticated financial management is the first step to building value in your business.  Ask yourself these questions:

1. Do you forecast cash out 4 to 6 weeks on a weekly basis?
2. Does your accountant produce a UCA Cash Flow Statement (the only meaningful cash flow presentation, and heavily favored by banks)?
3. Do you regualrly discuss your cash flows with your banker?
4.  Do you monitor key metrics on a financial dashboard?

Most companies will answer NO, and that's why you should hire a B2B CFO.  David Kirkup, B2B CFO partner, 404 348 0326 - dkirkup@b2bcfo.com