Cash Management In Tough Times

As everyone knows, the economy is, and has been, horrible. I thought I would describe how one of my clients has begun to respond.

My client is in the commercial and residential heating and cooling business. In our region, I am informed that 8 similar businesses have failed in the last 12 months. By the time I became involved (referred in by the client bank) my client is on COD (cash on delivery) with all of its major suppliers. Although they continue to receive product, the suppliers have required additional weekly funding with each COD delivery. The bank loans are current, but straining the company. Weekly and monthly cash flow was negative.

Our first step was to match the monthly and weekly expenses with the available cash flow from the service business and the margin after equipment costs from installations and repairs. Fortunately, most of the expenses are variable and rise and fall with the sales. So, labor, payroll taxes, fuel, installation costs of equipment, and the like, move up or down with volume. The fixed expenses were the hardest to reduce: salaries, office, warehouse, health insurance and in particular monthly installment loan payments, plant mortgage, and the additional vendor payments. Further, there is no supplier credit available. We downsized the fixed expenses to match current, and much reduced volumes, assuming no fast recovery. If it happens, great, but we are planning for the worst. So, we budgeted to cash flow break even.

With a little bit of additional owner capital, we are approaching the suppliers. The suppliers would like to continue working with my client. After all, there are only a few still operating in our region, and the suppliers need customers too. So, we are offering some up front cash with two requirements: 1 – the gross supplier balance will be permanently reduced 50% and 2 – the additional weekly and monthly payments, above the COD payments, will be cut by 50%. In the event my client does not make the now reduced additional weekly payments to fully pay off the reduced balance we negotiate, the full balance will be restored. And, important to the suppliers: they are all treated equally, so that none get in front of another. These adjustments free up weekly and monthly cash flow to 10% of sales. That extra cash will be used to reduce bank and installment loan balances. But, once the economy turns (it will) we will have freed up resources by having reduced the payables balances, and we will recover faster.

It is not easy, but in this economy, the suppliers are willing to help, my client is taking the drastic but necessary cost reduction steps, and they will survive this economic crisis.

The point is to be proactive. Start with the cash available from sales, and match the expenses to that level. Work with the banks and the suppliers, and the business can pull through.