Cash is King

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Cash is King - May 5, 2009

Posted by: John Williams in Articles

Cash is king to successful businesses! Unfortunately, to many entrepreneurs, cash is often viewed as a secondary consideration that might come from sales or reduction in expenses. Expense reduction may not actually create value, cash and may lead to inefficient operations. Focus on sales creation alone can bring a company to disaster.

Take the case of Stoneham Chemical Company (name changed). The company is a small specialty products company in a niche market with high barriers to entry. The product is non discretionary but there is limited potential for growth. The owners are experienced in developing and running the business, but have been focused on growing sales.

The owners, Arnold and Elizabeth Girard, had turnover in their accounting manager position, and recently adding an experienced person to manage the administrative operation. The company, however, was bumping up against its credit line limit and saw it bottom line income disappear in the last year. Fortunately they sought the help of a B2B CFO.

A quick review of the balance sheet and sales records pointed out the first significant problem:

	Year 1	Year 2	Year 3
Sales	$28,000,000	$27,600,000	$28,400,000

Accounts Receivable	$2,650,000	$2,450,000	$3,975,000

Days Sales Outstanding	34.5	32.4	51.1

A review of the process showed that there was no management of the Accounts Receivable occurring. While the collection effort was divided among several employees, there was no tracking of the success of these calls. Additionally, there were no clear goals set among the collectors and on review of their efforts. As a result, the percent past due went from 25% to 63%. Their newly acquired B2B CFO resource set up a management process to review the results of each person's efforts and measured them against each other. The result was that in two months the Accounts Receivable balance declined to a Days Sales Outstanding of under 30 days. Instead of the Revolving line balance being at 98% of the limit, it dropped to less than 50% of the loan limit.

Inventory is another area where, when companies do not control the levels, they experience severe cash problems. A high inventory position is even more difficult for companies to recover from since they must increase sales first and then wait until the customer pays for the sales of the excess product. Often this is a fire sale and does not allow the company to recover what they paid for the inventory initially.

Several other steps were taken to move this company to record profits. The next steps taken will be the subject of the future Blogs.