It’s Not About Profit – It’s About Cash

When business conditions are tough, keeping a close eye on your company’s cash flow can be the difference between survival and bankruptcy. On the other hand, when business conditions are great and sales are growing like crazy, keeping a close eye on your company’s cash flow can be the difference between survival and bankruptcy.

Profit is important to Wall Street and the tax collector. But what your suppliers, landlord, employees and the electric utility care about is your ability to write a check that won’t bounce – that you have the cash you need, when you need it. Your company can be booking lots of profit but be short of cash to pay your bills, with catastrophic results.

One of our firm’s clients was in the security business. The CEO, concerned about challenges he saw in the company’s near future, felt the need to have more cash as a cushion against the uncertain days ahead.

Our initial analysis of his operations showed that the company’s annual sales were in the range of $70 million, but his Accounts Receivable were averaging 65 days even though his payment terms were 45 days. All of his customers were large corporations and banks who had to be invoiced and who often took their time paying those invoices. As a result, he had to borrow money to fund his operations while waiting for customer payments to arrive.

An obvious solution to this cash flow problem would have been to call his customers as soon as a payment was late, requesting immediate payment. Another option was to change his credit terms. The problem with these perfectly logical alternatives was that the CEO was fearful his customers might simply take their business to another supplier.

Looking further, we saw that his cash problem was not entirely the fault of his customers. When we analyzed his billing processes we saw that it was taking his people an average of 12 days to get an invoice mailed. Documents related to the monthly invoices had to go through three different departments to get processed.

Removing those inefficiencies by streamlining the company’s procedures substantially reduced the time to get invoices into the mail.

Additionally, we discovered that in nearly a third of the invoices supporting documents for the invoices were missing or mishandled. We designed a checklist for use by his staff that lists every document and signature needed to send out the invoice. With everyone using same control sheet,  consistency was assured and unnecessary billing delays were eliminated.

Finally, we helped him institute procedures to prepare invoice in a continuous process rather than being batched.

The result: we cut his invoice processing time in half, and freed up over $1 million in cash.

What could your company do to improve your all-important cash flow?

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