CASH MANAGEMENT the business unless your loved ones are willing to bail you out with cash .
KNOW HOW BANKERS VIEW YOUR BUSINESS
When Gary entered the meeting room , in front of him were not only his relationship manager and her assistant but also the district manager and two gentlemen dressed in suits — a team from the bank ’ s Special Credit Division . They explained that they were charged with managing clients deemed by the bank to be highrisk . In some banks , this division is called “ asset management ,” “ credit restructuring ,” or “ special business services .” We call it the Hospital Division .
These men are responsible for determining rapidly if a client is providing the best return on the bank ’ s capital assets , relative to the risk of loss . If not , it is their job to minimize the risk of recovery of capital as quickly as possible .
Gary was absolutely shocked . How could his bank see him as high risk ? Had not his bankers read the recent financials ? He was livid .
UNDERSTAND THE ROLE OF CASH
When Gary met with Alan Miltz and his team at Cash Flow Story , however , it was clear that his bankers were onto something : his business had inadequate cash flow . Most businesses are profitfocused , and in Gary ’ s case , revenue and profit were growing at a clip . However , there is an old saying : Revenue is vanity , profit is sanity , and cash flow is king . You do not pay your bills or distributions with profit . You can only buy that nice car or holiday house when you have sufficient monthly cash . And Gary ’ s Furniture did not have healthy cash flow .
In Gary ’ s case , the bankers could see that in his industry , a business should be expected to produce between $ 2 to $ 3 worth of revenue per $ 1 of net operating asset investment . He was producing only $ 1.56 .
His balance sheet was also carrying too much unproductive capital . Gary ’ s business produced a gross margin of 31 cents for every $ 1 of revenue but required
41 cents of working capital for every $ 1 of revenue . That means that for every $ 1 of sales , the business required 10 cents more working capital than it actually produced in gross margin . As a result , Gary was going backwards in cash — and selling more would worsen the situation of the business . This is what we mean when we say he was “ growing broke .”
SOLVE A CASH CRUNCH
To fix the situation , Gary had a choice of two main strategies : increasing his gross margin or reducing his working capital . If he didn ’ t make a change , his company was not going to survive . The bank was not willing to provide further increases in funding . He didn ’ t have the cash capacity to repay the bank . That meant Gary could not continue doing business as he had .
Fortunately , there are seven levers in a business that you can tweak to improve cash flow dramatically and sleep better at night . These are price , volume , cost of goods sold , operating expenses , accounts receivable , inventory / work in progress , and accounts payable . Even a one-percent change to one of these levers can make a difference . We call this The Power of One .
TURNING THE SITUATION AROUND
Once armed with this information , management can construct a plan that is focused on achieving a particular cash or return outcome using key performance indicators ( KPIs ) around these seven levers . In Gary ’ s case , reducing accounts receivable from the company ’ s debtors by five days and its inventory by 15 days would help the business reduce its debt significantly and rebuild its relationship with the bank . Neither move was seen as a stretch . And overall , these changes would reduce its negative cash substantially .
Gary ’ s Furniture put into place a formal KPI structure against which its team could measure its progress . Gary rolled out this program across all aspects of his business so everyone knew the parameters of success and the progress the company was making .
Working together , with clear definitions of success , Gary ’ s team turned around the business ’ cash flow very quickly . The company has since moved to a much more favorable position with its bankers , who were astounded by the business ’ rapid turnaround and significant debt reductions .
You can get by in your business with decent approaches to People , Strategy , and Execution , but not if you run out of Cash . Having sufficient cash is the key to surviving another day . Fortunately , with the right ideas , tools , and techniques , it is possible to get through the rough times and fuel the good ones as you scale up . +
Verne Harnish is founder of the worldrenowned Entrepreneurs ’ Organization ( EO ), with over 12,000 members worldwide , and chaired for fifteen years EO ’ s premiere CEO program , the “ Birthing of Giants ” held at MIT , a program in which he still teaches today . Founder and CEO of Gazelles , a global executive education and coaching company with over 210 partners on six continents , Verne has spent the past three decades helping companies scale-up .
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