Posts Tagged ‘bank’

Slow Economic Recovery Makes Business Cash Flow A Priority

June 30, 2010

by Doug Smith, President, The Woodhaven Group

The economy is not bouncing back as quickly as some expected.  There is confusion and doubt about the path of the economic recovery.  Even the economists that projected a choppy recovery are seeing that the resumption of growth is slower than anticipated.

This means more than ever, it is important for every business of any size to maintain a strong cash flow position.

In my opinion, the facts supporting a continued slow recovery are obvious:

  • Consumer confidence remains mixed at best.  Two different reliable reporting groups  reported May consumer confidence moving in opposite directions.  For many reasons, I believe consumers do not feel good about things now and I don’t see that changing for a while.  The future of the economy is tied directly and indirectly to the feelings of the everyday consumer.  If they are not confident then the consumer will not spend and cash flow of businesses will be impacted.  This important indicator will have to be closely monitored going forward to determine what the real truth is.
  • Housing sales are not showing any upward momentum.  With the government tax credits going  away there are fewer homes being sold.  This decline reverberates throughout the economy.  There will have to be a further drop in prices to trigger an increase in demand.
  • Commercial real estate problems still exist.  Increased vacancies in retail and office space is a reflection of a soft economy.  If businesses do not expand or even reduce in size then they don’t need space.  The landlords holding this space still have mortgages to pay. This problem will still be a front burner issue in 2011.
  • There will be no more government stimulus prior to November 2010 elections. The prior stimulus methods temporarily helped boost the economy.  The political mindset now is to reduce debt.  Going forward,  the private sector has to carry the weight of the recovery by themselves. 
  • The Federal Reserve will not reduce interest rates further.  When it comes to lowering interest the Federal Reserve has done all that it can.  Don’t look for lower rates to further stimulate the economy.
  • The unemployment is still high and will be for the forseeable future.  Government census workers helped boost employment for awhile.  Additional workers will only be hired as business confidence suggests a reason to expect improved revenue over the longer term.  That confidence currently is not there.

So, what should a business be doing?

Here are 7 action steps your company should be doing right now:

  1. Have realistic revenue goals going into the second half of 2010.  Do not gear up for a sales increase that won’t be there.  Your original sales projections for the year may now be outdated.   All other expense areas take their direction from the sales plan so get it as accurate as you can.
  2. Know your business’s breakeven point.  Make sure you operate at or below it.  Failure to do this will consume precious cash flow.
  3. Maintain good relations with key suppliers.  Don’t create surprises for your partners and you will find most of them will be there to help if you need assistance like extending terms.  Do this by communicating how things are going.  It helps your suppliers plan for the future too.
  4. Do not lose existing customers while attempting to generate new business.  New customers cost more to add than keeping old customers. If you have a zero sum game with the number of customers in  your database this too will eat up cash flow. A tip to keep customers happy is to deliver some type of  added value (ie: free shipping, etc) that may not be expensive to do but is attractive to your customer.
  5. Now is not the time to start new projects.  Keep a cash reserve and add to it if possible.  New opportunities will still exist in the future.  Make sure you are there to capitalize on them.
  6. Keep marketing costs in line with revised sales projections.  Do not assume that by increasing the marketing budget that more sales will automatically follow.  Don’t stop marketing but invest dollars in marketing channels that are proven.
  7. Keep gross margin in line.  Do this by making sure you are priced to make a profit.  That does not prevent you from running a short-term promotion that might temporarily decrease gross margin percentage but increase gross margin dollars.

A positive:   Banks appear to be adding fewer reserves for bad loans than before.  This will increase earnings and should start freeing up money to lend to consumers and businesses. This will be one source of cash flow that well run businesses will need in order to grow going forward.

Make sure your business model and financials are in good shape to access this cash from your bank as it becomes available.

Cash flow is the lifeblood of any business, especially in uncertain times.  Make sure you are protecting it.

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Reduce Surprises With A Rolling 3 Month Cash Flow Projection

May 25, 2010

By Doug Smith, President, The Woodhaven Group

“Cash is more important than your mother.”  A west coast business professor once said that and as a former CEO I agree.  Just for the record my mother would agree with me.

With all the volatility occurring in the economy it is very difficult for any business to plan ahead.  We see turmoil in Europe that may reduce exports, a consumer only beginning to spend again, and private and public debt at uncomfortable levels to say the least.

What is an owner, CEO or senior manager to do in an environment like this?

First, I would remind you that your company runs on cash.  If you run out of cash you either have to replace it or go out of business.  Therefore, it is best to anticipate any peaks or short falls in your near term cash position so you do not find yourself making crisis management decisions when, for instance, it is time to make payroll.

The best tool to use is a rolling 3 month cash flow projection that lists your anticipated inflows and outflows of cash.  In otherwards, where is your cash coming from, where is it going and how much do you have left over?

In my opinion, this should be a monthly cash flow projection that is updated weekly.  If cash is extremely tight and unpredictable then a rolling weekly cash flow forecast is even better.

Meet weekly to update the projections with key management team members.  A side benefit will be a clearer understanding by everyone where the most productive use of cash is occurring.  I found this to be a positive energizing exercise for my management teams.

What to do if you see a shortfall in cash coming?  Here are a few options:

  1. Have a line of credit in place with your bank and use it as needed.  That is what it is there for.  Your banker should receive updates of your cash flow so he can anticipate the request and payback.  He will be impressed how you are managing your cash situation.  He will probably wish his other clients were doing similar calculations.
  2. Speed up payment of accounts receivable.  There always seems to be late payers and being aggressive in collecting may be all the added cash you need.
  3. Get extended terms from your key suppliers.  Rather than just delay paying, I have found it best to ask them for a temporary extension on terms.  If you have been a good customer and paid as agreed this should not be a problem.
  4. If you are a manufacturer one solution may be simply to return old inventory to your supplier and get a credit.  Apply the credit and it may actually offset a portion of the next invoice due.
  5. Cut expenses.  No doubt in the weekly management meetings,  areas will be identified where expenses can be reduced without hurting revenue. As CEO or owner you may have to make the final decision when and where to cut in order to get the action that needs to be taken.   

A rolling cash flow projection is one of the best management tools there is.

Be proactive.  Anticipate your short-term needs and you should not have any cash flow surprises.