cash flow

Cash crunch keeping you up at night?

Thought Leadership  presented by Foresight CFO Consulting, Inc.

Cash flow is the lifeblood of business. In fact, many CEOs will tell you they’ve lost nights of sleep when feeling a cash crunch — and not without reason: According to a U.S. Bank study, 82 percent of business failures are due to poor cash management. This is the story of one CEO.

The Problem – Last year, we took on a new client who was feeling the pinch. The CEO was living from one customer check to the next. Under pressure, he was frantically calling the bank to make sure he could still cover payroll for several consecutive months. There is no worse feeling than not being able to pay your hard-working employees. In fact, it’s devastating.

Employees can easily lose confidence, pride and loyalty when they fear not being paid for their work, not to mention, those feelings of uncertainty to provide for their families. The CEO was sweating every minute detail trying to figure out what the heck he was doing wrong instead of leading the business.

Immediate Action – As a first step in teaming with the CEO, we created a 12-week cash forecast. The forecast helped us uncover when to appropriately pay vendors as well as how to speed up collections from customers.

Analysis and Research – Over the next few days, we conducted a deep analysis to understand accounts payable and accounts receivable cycles, examined inventory turn, reviewed contract terms, and learned related businesses processes including monitoring and enforcing collections. In addition, we prepared a peer benchmark analysis, which showed that inventory was on hand three times longer than industry averages. It’s all part of our system to uncover where the cash flow issues really are. After all, this company sold both products and services at a profit, so we had to pinpoint why they were struggling to fund payroll and potentially more expenses over time.

According to Inc. contributor and the author of Scale: Seven Principles to Grow Your Business and Get Your Life Back, David Finkel pinpoints The 4 Most Common Causes of Cash Flow Challenges are typically poor collections, not pricing offerings high enough, miscalculating or forecasting expenses, and overall sales just being too low.

An Unlikely Culprit – To the CEO’s surprise, rapid growth was at the heart of the cash shortage. The gap between money outflows had actually surpassed the money inflows due to the timing gap between when customers pay and when the company disbursed payroll and equipment payments. We call this “float,” which often occurs slowly over time without being noticed — partly because systems or processes didn’t keep up with the company’s growth rate.

The Solution – We continued to develop and use the weekly 12-week cash forecast to gain near-term cash flow visibility and to make payment decisions. Not forecasting cash flow is one of the top reasons businesses fail. Forecasting seems like guess work, anything can happen—customers do leave, economy can strike, and products can fail creating the demand for refunds. But the time, energy, and effort to forecast on a continuous basis such as our 12-week cycle and monitoring it weekly, significantly reduces the chance of a costly mistake.

Simultaneously, we accelerated billing frequency from monthly to semimonthly, added deposits and milestone payments to customer contracts, and created a streamlined collections process with weekly monitoring to act before bills became overdue. Lastly, we worked with inventory management to reduce the number of days before equipment was deployed and cleared stale inventory on a scheduled basis.

Results – Within six short weeks, we were able to collect customers payments 23 days sooner. Then over the next few months we were able to beat industry inventory turn averages, this alone liberated $498 thousand a month of working capital.

You can imagine, at this point, the CEO was able to exhale as closing the gap between accounts receivable and accounts payable came to fruition so that a small line of credit provided an adequate safety net. Sleeping the night before payroll is no problem now.

For some initial advice on how to forecast cash flow, check out this article on Fox Business: 4 Tips for Accurate Cash Flow Forecasting. Or give us a call to learn more about our 12-week cash flow forecast and cure program.

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