Imagine ending the year with a fat bank account, no balance on your bank line of credit; comfortably meeting all supplier, tax, and payroll obligations; and just for good measure, prepaying some mortgage debt just because you can. Now back to today.
You likely ended last year with a fairly lean bank account, a painful memory of a few of your tax payment days, playing roulette at times with your bank line, and not even considering the idea of paying off any mortgage debt early because you didn’t have the cash. So how do you get from where you were at December 31 to that cash rich utopian position first described? You do it by taking these steps:
1) Analyze the profit contribution of the individual components of your business. This means you must segregate your stores, your wholesale inventory, etc. If your current accounting set-up doesn’t allow you to do this, call your vendor and tell them what you want. All of the reputable GL software on the market has this ability.
Identify any areas that are losing money and therefore draining your cash. You won’t be able to reach that cash-rich position you want so badly without either making those sectors profitable or getting rid of them. Ultimately, sale of the losers is usually the best win-win position — you get the benefit of immediate cash from the sale plus your monthly cash drain is instantly cured.
2) For profitable sectors, drill down one more step to individual units and/or trucks. Figure out which units make money, which don’t and then determine why. Again, commit to the hard decision of either getting each one profitable or getting rid of the unprofitable culprits.
3) Analyze individual customer profitability. This entails more than just a gross margin assessment of each customer, although that’s a good starting place. Do a net profit analysis by factoring in payment trends, holding cost of money, sales calls, and that more nebulous “hassle” factor; you know, the customers that drive your staff crazy. Staff time is money. Use the same hard-nosed approach with your customers as you did with your sectors and units. Each one must be profitable. Try to make losers profitable through increased margins or service fees. If you can’t make them profitable, allow them to take their business elsewhere.
4) Analyze the efficiency of all of your core business processes. This means you must first identify each of your core business processes! Unfortunately, we all have a tendency to lie to ourselves about how well we’re doing in the efficiency department. You may think you have a certain process, for instance dispatch, down to a science. You know it’s a whole lot better than a few years ago. In reality, however, your dispatch may be much less efficient than your competitors. The only way to know how you are really doing is to benchmark yourself against others in the industry. Benchmarking should also include your staffing levels. It’s easy for process inefficiency to be coupled with too many people.
5) Pay close attention to receivables, payables and inventory management. A company’s competency (or lack thereof) in these three areas of operations will dictate cash on hand. If you lack cash now and want to have a fat cash bank balance by year end, you will likely need to:
• shorten your terms
• collect all accounts by EFT
• only extend credit to people that can pay
• monitor customer creditworthiness regularly
• pay sales commissions on collected dollars
• negotiate supplier prices
• negotiate supplier terms
• reduce inventory levels by eliminating slow movers and using a just-in-time approach on the items that sell well
6) Scrutinize your balance sheet for any non-producing assets. If you find any, either sell them or put them to work producing income and profits. Don’t just let them sit there! Typical culprits are land, closed sites and idle equipment.
7) Analyze your debt structure and what it’s costing you. If you are not involved in any acquisition or expansion projects, your best use of any spare daily cash is reduction in your short-term debt. Another cash-producing debt strategy is to consolidate your loans and drive down your interest costs through tough loan bidding and negotiating. It is still a borrower’s market out there, so take advantage of it while you can. This doesn’t mean, however, to over-leverage. All that does is produce a one-time cash infusion that you pay dearly for over many years of payments!
8) Watch your spending. When you buy new assets, make sure they are producing assets. When you do buy new assets, finance them appropriately, which normally means using 75% financing.
9) Create new sources of revenue and income streams. What better time than now to get your business thinking out of the box? Maybe it’s time for you to jump into new software, equipment, dispatching service, customer education, or more. Remember that great quote, “If you keep doing what you’ve always been doing, you’ll keep getting what you’ve always got.” If you want to make a serious change in your cash position, it may take a serious change in your business with entry into new products or even markets.
To boost your cash, you don’t even need to do all of these steps. If you seriously commit to at least five of the nine steps, working at them diligently throughout the year, you will see a major positive change in your cash position!
