Up Your Cash

We see many businesses that are growing profitability, but are having difficulty continuing their growth specifically due to the lack of cash. You’ve heard the expression ‘cash is king’, well it is true.


Several things can be done to ensure this does not happen to you. Even if you are growing profitably and you have enough financial resources to fund the growth, improvements in cash flow will enhance your profitability with the ability to pay down debt or take advantage of vendor discounts.

The following are the 7 best ways to enhance your business’s cash flow:

1. Negotiate better terms with your vendors – payment terms of 40 days vs. 30 days significantly enhances cash flow – a business with vendor related costs of $14m that extends the average days to pay from 30 to 40 days enhances cash flow by $400,000!

2. Get some cash down up front - This is a great way to have your clients fund the projects not you.

3. Be careful with your payment terms with customers – balance due on completion is much better than 30 day terms. If you do extend credit terms, be diligent in your collection practices. Even slight improvements in day’s sales outstanding (DSO) can be a significant enhancement to cash flow. If you are a $20mm business with $2.2mm in accounts receivable, a 5-day improvement means a $274,000 incremental increase in cash flow.

4. Manage your inventory better – the same principal as DSO and average days to pay applies to days of inventory on hand. Any improvement here has serious implications to improve cash flow.

5. Watch your operating expenses. For most businesses, the most significant operating expense is payroll and payroll related cost, but carefully watching all expenses is imperative. Any improvement directly enhances cash flow.

6. Use a line of credit at the bank to plug any shortfall of cash flow and allow you to take advantage of vendor programs

7. Watch what you take out of the business. Shareholders use the business to pay business related and other expenses, but anything you take out directly reduces cash.

Additional cash generated by using the above techniques can be used to grow the business, to paydown debt, or to take advantage of quick pay vendor discounts. Remember taking advantage of quick pay discounts is an excellent way to leverage your cash flow to enhance profitability. Taking advantage of a 2%10, net 30 discount returns approximately 37% – so it may make sense to tap your line of credit occasionally to take advantage of the vendor discount.

Use the following formula to calculate the cost of not taking a discount.

Cost of failing                    = Discount %             X     360
to take discount                   100% - Discount %       Final due date - Discount period

So, in the 2%10, net 30 example above .02/.98x360/20 = 37% - That’s a lot to give up by paying in 30 days instead of 10.

Budget Season

Budgeting season – is it just finishing or just starting?


I’ve been doing a lot planning with clients for the last couple of months. I believe now is the time to really turn up the heat with nailing Q4 (as best as possible) for the next 30 days and keep those planning sessions active. Big businesses and small.


I’m talking about your financial models for next year – planned monthly P&L and balance sheet, personnel and capex plans, etc. If you’ve just completed the planning a) good job, and b) pull it back out and use as a working document. If you haven’t completed the process, it’s time to get your ass in gear.

‘Times are a changin’, and the world is moving fast – especially now days and there are a lot of opportunities out there, but we all need to be careful. The reporting mechanisms, however simple or complex, need to be in place, timely and accurate. It’s critical everyone understands the business’s strategy and the scorecard of how the business is performing – I always picture a football scoreboard.

With that said, I hope everyone has a strong rest of the year – as in a 10K running race, finish strong and feel good about the race. In your business – the race doesn’t end at 12/31, but it’s clearly a mile marker – so push yourself for the next 30 days – hit the mile marker strong and set yourself up for a great year in 2010.

Guess what? Budget season never ends. I don’t even like the term budget season – it’s planning and execution season and it goes 12 month a year. Get yours going now.  If you need any help, let me know - it's the best part of the game.

Surprise Late SEC Announcement re: SOX Compliance

Look at this announcement by the SEC released October 2nd.  Count they have waited any longer.  Small publics have another year.  What's the guess, that many couldn't comply?  My public clients were prepared.

/jon


Small Public Companies to Begin Providing Audited Assessment of Internal Controls Over Financial Reporting in Nine Months


FOR IMMEDIATE RELEASE

2009-213

Final Stage of Section 404 of Sarbanes-Oxley to Begin in June

Washington, D.C., Oct. 2, 2009 — The Securities and Exchange Commission today announced that the smallest publicly reporting companies will begin complying in nine months with the final portion of a key provision of a 2002 corporate governance law that requires companies to report to the public about the effectiveness of their internal control over financial reporting.

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Additional Materials

Study on SOX Internal Controls

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Under the provisions of Section 404 of the Sarbanes-Oxley Act, public companies and their independent auditors are each required to report to the public on the effectiveness of a company’s internal controls. The smallest public companies with a public float below $75 million have been given extra time to design, implement and document these internal controls before their auditors are required to attest to the effectiveness of these controls.

This extension of time will expire beginning with the annual reports of companies with fiscal years ending on or after June 15, 2010. This expiration date previously had been for fiscal years ending on or after Dec. 15, 2009. The extension was granted so that the SEC’s Office of Economic Analysis could complete a study of whether additional guidance provided to company managers and auditors in 2007 was effective in reducing the costs of compliance. Because the study was published less than three months before the December 15 deadline, the Commission determined that additional time is appropriate and reasonable so that small public companies and their auditors can better plan for the required auditor attestation.

While the reporting and auditor-attestation grew out of the 2002 law passed by Congress, all U.S. public companies have been required to maintain internal accounting controls since 1977.

“Since there will be no further Commission extensions, it is important for all public companies and their auditors to act with deliberate speed to move toward full Section 404 compliance,” said SEC Chairman Mary L. Schapiro.

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Performance Measures

KPI's and performance metrics have been used for years helping companies focus on goals and hold managers accountable. They are typically misused for a number of reasons.

They:
• Are not understood

• They are too complex
• They do not address strategy

For these reasons they are not effective.


Performance measures need to be carefully thought out - they need to drive profitability and strategy. They need to be simple, visible, and understood by the entire company.

Many companies don't address these correctly – most haven't thought them completely through - some companies have abstract measures that are not understood or can not be affected.

The key here is to look at the revenue areas and determine the simplest attributes of each category. Ensure the driving data is easy to obtain on a timely basis and someone owns the driver. People need to take full responsibility for their results. We make assumptions to develop targets for each driver and then measure actual performance. The assumptions need to be reviewed quarterly and adjusted based what we've learned over the previous quarter. This provides a powerful tool that drives results.

It's Budget Season

The typical budgeting process used in today's smaller and midsized companies (all companies for that matter) is an exercise in futility. The process which should be extremely useful consumes significant company resources and has the potential to cause team friction limits business potential.

We should think in the terms of what is possible. Paint the picture - of what that possibility looks like. As in building a house - what the house looks like when it's done. They prepare the blueprint of the individual pieces that need to get done, by who, and when – with the objective to complete the house by end of the fiscal year.

We make assumptions along the way and as things change, we need to re-address those assumptions - quarterly, based on what we've learned along the way. The budgeting process becomes an operating plan that is constantly adjusted.

This now becomes a dynamic process and a powerful tool for strategic growth.

I like the rolling budget concept so as one quarter falls off, we add another quarter to the budget. Then the budget process is a continual process.