Cash Planning
Profit and Loss statements are nice, but at the end of the day what truly matters is cash flow. Cash is King! Best practices tell us to manage our collections aggressively, keeping them as close to 30 days or less, if possible. Focus on customers that pay promptly. Make sure that service and customer support is superior to these customers. Payables are a great source of cash (working capital) and should not be paid too soon. Forty-five days is typically a good benchmark. If necessary, renegotiate your payment terms. This can be done as part of the negotiation for better pricing on your raw materials. Stay between 45 and 60 days at Max.
Analyze your account registers for all payments you have made for the last 60 days. Break them down on a spreadsheet by week. This should give you a good idea of what your weekly spending typically is. You will notice that many of your payments are approximately the same each month. Project those forward for the next 13 weeks. By projecting the receipt of our accounts receivable forward on a weekly basis, we can predict future incoming cash flow. By projecting payables forward, based on their terms, we can predict future outgoing cash flow. Using this format allows us to plan our cash flow much more effectively. We can make adjustments on purchases and payments accordingly. There are many templates available for this traditional 13-week cash flow plan. This one is available on FinancialCheckupReport.com for free.
Debt Structure
The capital structure of a company is composed of the company’s debt, investment contributions and retained earnings. It is used to finance the assets of a company, which in turn produce revenue. Proper debt structure matches debt repayment to the amount of time it takes the asset to produce cash flow. In other words, short-term assets such as accounts receivable and inventory should have short-term notes, typically lines of credit. While long-term assets such as plant, fixtures and equipment should be financed with term debt; again, repayment terms should match the reasonable, useful life of the assets. Having too much short-term debt with aggressive repayment terms puts unnecessary pressure on the company. Likewise, having too much short-term debt with interest only payments can cause the company to misuse its debt and generate cash flow by borrowing it. This obviously obscures the financial performance of a company.
Realign Your Debt
Certainly, companies who find themselves in crisis should restructure their debt immediately. However, it’s interesting to note that even healthy companies may regularly restructure their debt. We regularly help our clients to restructure their debt in order to optimize financial performance and cash flow.
Non-earning Assets
As I mentioned, assets produce income; at least they’re supposed to. Ideally, they should produce enough income to cover their debt payments and expenses of ownership and operation, plus a reasonable margin. If they don’t, they become a drag on the company’s resources and profits. These assets should be sold immediately.
Put the Right People in The Right Seats
Imagine you are starting your company from scratch: Create an organization chart with job descriptions, but no names. Identify the important traits that each Management position needs to have. Now, try to match your people to those positions based on their skills and abilities. You will likely not be able to fill all of the positions. Those unfilled positions are the ones you need to hire the right people for. The managers who were unable to be slotted in one of those positions are the ones you may have to let go when you find a new manager with the optimal skills and abilities. Of course, in the interim, you should continue to work with your managers to make sure they understand the results that are expected of them and, that they take the appropriate steps to optimize their performance. This process will not happen overnight and may take as long as six to nine months to implement.
Next Steps
The aforementioned steps are fairly basic, but their effect on your organization can indeed be massive. In order to achieve them, you may need to make some changes to your leadership structure. You will also need to have weekly meetings in order to hold your leadership accountable for their progress. After you complete these steps, you should be looking at important strategic issues to improve your bottom-line results. This includes identifying your most profitable customers and markets. These customers should not be a drain on your resources. They should pay promptly, and ideally be in a growth sector.
You will also need to decide what you want your company to look like in three to ten years. Re-examine your company’s mission (what we do). Re-establish your company’s core values (how we do it).
Best of luck, the sky is the limit!
Burke Advisory
December 20, 2019
Kevin Burke is a member of the Turnaround Management Association and a Certified Turnaround Professional. A graduate of the Villanova School of Business, he has over 35 years of experience in banking and executive management. His management consulting practice is located in Troy, Michigan.