John

CashFlowABC Episode 20 – Forecasting Using a Planning Bill

May 312011

Forecasts are more accurate in the aggregate. But, for production planning, capacity planning and procurement you can’t use an aggregate forecast. You will need a tool to determine the individual SKU forecast so you may perform your planning functions that allows production to function. There are multiple versions of planning bills but for now we’ll focus on the easiest one which is a straight forward planning bill.

First to use a planning bill you will need to divide your products into product families. APICS defines product families as “a group of products with similar characteristics, often used in production planning (or sales and operations planning).

A planning bill uses past usage history to determine the percentages of sales within a product family. As an example, within the product family widgets the blue ones consisted of 30% of the sales, the red ones 20% and the white ones 50%. This history can be manipulated to take into account seasonality or higher or lower sales. Let’s say your sales group forecasts that the demand for widgets will be 1,000,000. When this planning bill is applied the forecast will be 300,000 blue ones, 200,000 red ones and 500,000 white ones. But it can go further than that. A planning bill can be a multi-level bill that takes into account further variations. Let’s say there are different sizes of widgets. Within the white ones ½” made up 60% of your sales, ¾ inch was 30% of your sales and 1” was the remaining 10% of your sales or white widgets. That would equate to a forecast of 300,000 ½”, 150,000 ¾” and 50,000 1” white widgets. Now, to make a widget you need the corresponding shim… I think you’re getting the idea. There’s an example of a planning bill on CashflowABC for you to use to see how powerful a tool this can be.

Planning bills need to be reviewed and maintained on a regular basis. As you sales change so will your planning bills. Since a planning bill uses historic data to determine product breakdown within the product family you will want to weight the most recent data to capture the latest demand trends.

There are many advantages to using planning bills. It helps to keep your forecasts accurate for the end items. They can be multi-level and even tied into your individual bills of material. It helps facilitate capacity planning and master production scheduling.

The one issue you need to be aware of is variances in demand that equate to the overall product family forecast. As an example, let’s say that in the example given above your demand for ¾ and 1” white widgets was reversed from the forecasted amounts. The person or people initially accountable for the product family forecast will say that their forecast was accurate that it’s someone else’s problem. In this case, which is rare, someone needs to take ownership of it. Not to take the blame but to determine why so future forecasts and planning bills will be more accurate.

CashFlowABC Episode 17 – Understanding Cash Flow (Part 2)

Podcast Episodes No Responses »

Mar 112010

Podcast: Play in new window | Download

The How & Why

Direct vs. Indirect method

Net Income & adjustments

Cash from Operations

a. Sources & uses of cash
b. Prepaid expenses
c. Accrued expenses
d. Accounts Payable
e. Accounts Receivable

Example: think about a $150 invoice from an electrician to fix a light switch. The work is performed in March and you have net 30 terms. In the Statement of Cash Flows, the effect of the $150 in March is to reduce net income by $150 and, because you have net 30 terms, it would be a source of cash in Accounts Payable because you didn’t pay for the expense. The effect on cash in March is zero and is shown by a “use” in the reduced net income and a “source” in the increased Accounts Payable. In April, when the bill is paid, Accounts Payable is reduced which becomes a use of cash on the Statement of Cash Flows.

Cash From Investing
Cash related to investing activities is the change in long-lived assets

Cash from Financing
Cash from financing reflects any activity in the equity (excluding retained earnings) section of the Balance Sheet or changes in any long term liabilities such as notes or bonds payable.

Change in Cash
Ending cash balance in your general ledger minus beginning cash balance. All cash accounts should be included – general accounts, Accounts Payable accounts, Payroll accounts, petty cash – all accounts that had any balance.

Example: Cash Flow Through a Retailer

From a cash flow perspective, it doesn’t usually get any better than retailing. In a perfect world, everything purchased from suppliers would be on net 30 terms and inventory would turn more than 12 times per year. In this scenario, the customer would be buying the product (usually in cash) from the company before the company paid for it.

At -15 days (fifteen days prior to the sale) $20 is paid – this could be phone expense, wages (related to purchasing or receiving the product), etc.. At 0 days (the day the sale happens) another $17.50 is paid out in expenses related to this sale. Once again, this could be wages, advertising, or any other non-product expense. The sale was in cash, so $150 is received from the customer, putting the retailer at a $112.50 positive cash position (150-20-17.50). At +15 days (fifteen days after the sale) the product that was sold is paid for at $75 and another $7.50 is paid in related expenses, leaving a net cash increase of $30, which is equal to the net profit on the sale.

As you can see, in an ideal situation, only minor expenses are paid for prior to the sale. This example is only an example – many retailers have significantly lower turns and have to carry those costs in advance of a sale. This is the reason that the Finance Department is always pressuring Operations to reduce inventory and many deep discounts can be found on slow moving inventory. It is also the reason that many retailers fail – too much cash was tied up in slow moving inventory and the business found itself undercapitalized.

CashFlowABC Episode 16 – Understanding Cash Flow (Part 1)

Podcast Episodes No Responses »

Feb 022010

Podcast: Play in new window | Download

The Statement of Cash Flow is the evolution of the Statement of Changes in Financial Position. It is a highly useful tool within the guidelines of Generally Accepted Accounting Principles (GAAP) to effectively analyze the operations of an organization from a financial perspective.

It is a common, and true, statement that “Cash is King”. This is why the Statement of Cash Flows is so important. When you understand what it’s telling you it becomes an enlightening view of the company. It is as if you have been going through a room in the dark for years and then you see it with the light on.

One of the companies where I have been Controller had a division that was privately held prior to it’s acquisition as a division of our company. The company ran about 40+% gross margins with 20+% net margins and wound up being acquired by our company for the amount of its’ debt to us. How could this highly profitable company come to such a demise? The company was excellent in sales, marketing, pricing, and product quality but what they didn’t do was effectively manage the inflow of cash into the business and it cost them the business.

By understanding the Statement of Cash Flow and looking at the information as it applies to your organization you can greatly increase value and longevity for your company.

The objective of the Statement of Cash Flow is to show you both where your cash is coming from and what you are spending it on. That is it plain and simple. By seeing the numbers quantified it will, to a large degree, confirm what you already know – it may be that all of the cash is coming from the bank or investors and the money going for capital investment or customer financing.

The Balance Sheet is a point-in-time report providing a birds-eye view of the financial health of the company while the Income Statement is an operational report telling how well the company did over a period of time. The Statement of Cash Flow is the bridge between the Balance Sheet and Income Statement and, like the Income Statement, is an operational statement and completes the picture of what happened in the business from one Balance Sheet to the other. Knowledge is power and cash is king.

Treatment of Revenue & Expenses

Components of Net Income
Usually a Source of Cash

Treatment of Assets

Types of Assets
Usually a Use of Cash

Treatment of Liabilities

Types of Liabilities
Usually a Source of Cash

Treatment of Equity

Types of Equity Accounts
Can be a Source or Use of Cash

Operational Impact

Effects of extended terms to your customers (A/R)
Effects of extended terms from your suppliers (A/P)
Effects of high Accounts Receivable and/or Inventory
Effects of lowering Working Capital
Digging out of a cash hole

For further explanation and illustrations, check out Understanding Cash Flow

CashFlowABC Episode 14 – Inventory Valuation Methodologies

Podcast Episodes No Responses »

Oct 202009

Podcast: Play in new window | Download

Valuation methodologies

Weighted Average

Weighted average is, perhaps, the easiest of the valuation methodologies. You have no variances to analyze, only variation.

As the title implies, weighted average costing averages the purchase price of products and absorbs any price variation into your P&L through Cost of Goods Sold.

Standard Cost

In Standard Cost, you establish a standard that you want to value your inventory at. This may be the initial PO price, a vendor quote, or an estimate based upon industry or process knowledge.

With standard costs, also come variances that must be analyzed for the system to be effective.

There are Purchase Price Variances (PPV) which are differences between your purchase price and your standard price.

There are Closed Work Order (CWO) variances that are the difference between your standard cost and the actual cost to produce a given product.

There are also Labor Variances, Factory Burden Variances, and Material Burden Variances that, like those already mentioned, are differences between the standard and the actual cost to produce a product.

Many company use the standard system as target costing and then manage to the variances.

Specific Identification

Specific Identification is probably the most data-intensive method. Specific identification requires you to serialize every piece of inventory. While this may be appropriate for tracking blades for a Sikorsky helicopter, it’s definitely inappropriate for producing millions of homogenous, low-cost items.

FIFO

First-In-First-Out tracks inventory as being used in the same order in which it was purchased, and is probably the way in which most companies consume inventory.

LIFO

Last-In-First-Out is similar to FIFO, but considers the most recent purchase as the first one to be consumed.

CashFlowABC Episode 12 – Turning Supply Chain Management into a Profit Center

Podcast Episodes No Responses »

Aug 182009

Podcast: Play in new window | Download

Turning Supply Chain Management into a Profit Center

There are a number of ways to generate value for your organization through the management of the supply chain.
One thing that you will want to do is publish your results publicly within the company.

This will serve three purposes:
    (a) Toot your horn – you won’t have to toot your own horn as much because it will be in black and white
    (b) Good results will set a precedent that will keep you going to constantly improve
    (c) It will inspire those around you to maybe compete in the process improvement arena
    (d) If you are an employee, it will set you up for your next review and if you are the owner it will increase your bottom line.

We’re going to pick some low hanging fruit here. This is by no means an exhaustive list of things to do, but it will get you on the right track and we can do an update in the future to expand the list. For the carrying cost calculations we will use a rate of 8% which is a reasonable rate for the purposes of these illustrations.

Inventory reduction

This is what almost every company wants to do. Reducing inventory squeezes cash out of the business on a dollar-for-dollar basis. There are two numbers that you will want to quantify when it comes to inventory reduction: (1) dollar value of the reduction and (2) annual carrying cost on the dollar value of the reduction.
For instance at one location I was involved with, we reduced the inventory from $17 million to $12 million over the course of a few months. What this produced was a cash infusion to the business of $5 million and another $400,000 reduction in annual carrying cost.

In episode 2 of CashFlow ABC’s we covered how to find the low hanging fruit, in episode 6 we showed you how to properly determine your reorder points and in episode 8 we address economic order quantities and all of these play a part in the equation. We’ll spare you a rehash of the three episodes that would surely be as juicy as microwave toast – check out those three episodes for the details. Suffice it to say, reducing the investment that your company has in its inventories pays off in real dollars to the organization.

Extended terms

As we seen with the discussions about the statement of cash flow, which I know had everyone on the edge of their seats, getting extended terms from your suppliers adds to the cash balance of the company. In addition, this will have carrying costs implications just like the inventory reduction. If you have a supplier that you have net 30 terms with a supplier that you normally have a $100,000 balance with. If you get the supplier to go to net 60 terms, you wind up with the equivalent of an interest free $100,000 loan because you now have an average A/P balance of $200,000. Like a reduction of inventory, this will inject the additional $100,000 into the company’s bank account and end up with a benefit of $8,000 in reduced carrying costs on this one vendor over the course of a single year.

Prompt pay discounts

Prompt pay discounts are commonplace in every industry. A supplier might offer 1% 10, net 30 terms or something similar – I’ve seen as little as 1/2% and as much as 5%. In many organizations, the effect of carrying costs isn’t seen until you get up to parent companies, so it isn’t as appreciated as much at the division or plant level and discounts are more tangible and evident and therefore more appreciated. Also, some companies can’t offer extended terms because of company policy, but they can offer the discounts.
Objectively, you have to determine your requirements and at what threshold you need for a discount to be preferable. If cash is an issue in your company, then usually management is valuing extended terms over discounts because the cash need is immediate and, by the same token, the value of reduced carrying costs may be visible to corporate, but terms discount will bring the benefit to your division’s P&L rather than corporate’s. You have to think logically and actually do some calculations to determine your answer. As an example, let’s say that you have an average balance of $100,000 with a supplier on net 30 terms offers you 1% 10, net 30 – you now have a decision to make.

Carrying cost benefit of the $100,000 average A/P is $8,000 annually and if you take the discount, you will be giving up 2/3 of the benefit because you will be paying in 10 days instead of 30 – a reduction of 20 days. To make the decision, take your annual purchases $1,200,000 (12 months X $100,000) multiplied by the discount rate of 1% gives you an annual benefit of $12,000 plus the carrying cost benefit on the 10 days that you have to pay in ($1,200,000 X 8% / 360 X 10 days = $2,667) and you come to $14,667. That one is a no brainer as long as you have the cash flow to handle it. This decision would turn around if you had 1% 10, net 60 because the carrying cost benefit would double to $16,000.

Good luck in your efforts and keep us apprised of your successes and opportunities for improvement!

CashFlowABC Episode 10 – The Statement of Cash Flow

Podcast Episodes No Responses »

Jun 232009

Podcast: Play in new window | Download

My Podcast Alley feed! {pca-6c7296ef12a7f56be0cf864a4412a32a}

We’ve seen a lot of queries lately asking various questions about the Statement of Cash Flow so we’re going to take this opportunity to demystify this alien evil. We’re going to use a basic Statement of Cash Flow for Little Johnny’s Lemonade Stand that he set up in front of his house. For further information on how to prepare a statement of cash flow or to better understand cash flow and how cash flows through a business, check out Understanding Cash Flow from InstantController.com.

Cash Flow from Operations is where the meat and potatoes of the company are. A company can have a down month or year so the Net Income could be abnormally low, but the Cash Flow From Operations will tell the whole of the story of the direction of the company. You will want to at least see a positive number in the Net Income and Cash from Operations.

The Statement of Cash Flow always begins with the Net Income number. This is because the Income Statement is the basis for cash flow through the business – if you don’t make money on the income statement, you won’t normally have cash flow to worry about for very long. When looking at a Statement of Cash Flow, Net Income should be the first number you look for because it tells the story of whether the company is profitable. Little Johnny’s Lemonade made a net of $5 for the day – not bad for the little entrepreneur. Then add back into the net income the expenses that really didn’t cost cash – just depreciation for most companies. This is because depreciation is a non-cash expense – the cash was paid out when the asset being depreciated was purchased. In Johnny’s case, he only had $0.50.

Items that go in this section are changes in current assets (excluding cash) and current liabilities – the higher volume accounts that cash churns through. If an asset increases, it is a use of cash – it’s an asset to the business, but it takes cash to pay for it. By the same token, increases in liabilities are a source of cash because you are delaying the payment of a bill and you have the opportunity to use that cash for something else.

In Johnny’s case, his friend Henry said he would pay Johnny tomorrow for some lemonade today and he drank eight cups at $0.25 each! Thirsty bugger! So the 8 times 0.25 equals $2.00 in AR that Johnny has. While he had the sale, he still doesn’t have the cash until tomorrow when Henry pays him.

Mr. Wilson across the street said Johnny could have all the lemons he wanted for $3.00 and he could pay him tomorrow, after he had made his money selling the lemonade. So Johnny had the $3.00 in Lemons, but he didn’t have to pay for them on the spot, so this is a source of cash because Johnny can now use that $3.00 to buy Dixie cups for the lemonade! Johnny’s Accounts Payable at the end of the day is $3.00 to Mr. Wilson.

For the first day of operation, Johnny’s Cash Flow from Operations is Adjusted Net Income of $5.50 – $2.00 due from Henry + $3.00 payable to Mr. Wilson, for a total of $6.50. Any prepaid expenses would also be listed in Cash from Operations with the same rules as any other asset – increase = use of cash, decrease -= source of cash.

Cash From Investing is the section where any long term assets show their effects. For most companies, this is only Fixed Assets (gross). At the beginning of the day Johnny had to spend $10.00 on PVC lawn furniture to set his stand up with, so he has $10.00 tied up in fixed assets.

Cash from financing is where the effects of debt and equity show up. If you issue stock, the cash received for the stock would show up in this section as well as any proceeds received from the sale of bonds or from obtaining cash financing. In this case, Johnny was only 7 years old and had to get $20.00 in venture capital from Dad. It sounded risky, but Dad chose to roll the dice any way and loan him the $20.00.

Little Johnny’s Lemonade Stand
Statement of Cash Flow

Cash From Operations
Net income	5.00
Add: Depreciation	0.50
Adjusted Net Income	5.50

Decrease in AR	(2.00)
Increase in AP	3.00
Cash from Operations		6.50

Cash from Investing
Decrease in Fixed Assets	(10.00)
Total Cash from Investing		(10.00)

Cash from Financing
Loan from Dad	20.00
Total Cash from Financing		20.00

Calculated Change in Cash		16.50


Beginning Cash		–
Ending Cash		16.50
Change in Cash		16.50

From all of this, Johnny had an increase in cash of $16.50, which he had in his cash box at the end of the day. To prove this out, we can do it by looking at the actual receipts and disbursements:

Direct Method
	Loan from Dad	20.00
	Lawn Furniture	(10.00)
	Cash Sales	6.50	**
		16.50

Cash Sales
	Adj Net Income	5.50
	Cost of lemons	3.00
	Henry didn’t pay	(2.00)
		6.50

For further information on how to prepare a statement of cash flow or to better understand cash flow and how cash flows through a business, check out Understanding Cash Flow from InstantController.com.

— John

CashFlowABC Episode 9 – Key Performance Indicators

Podcast Episodes No Responses »

May 292009

Podcast: Play in new window | Download

In any business setting, you need to be measuring appropriate Key Performance Indicators (KPI’s) to keep on top of the performance of the business. The basic process for utilizing KPI’s is:

Identify what measurements are most important to your business
Measure the “current state” of the KPI’s
Establish targets for where you want them to get to
Measure the KPI’s on a regular (usually monthly) basis
Analyze the results and identify opportunities for improvement
Hold employees accountable for the numbers that they are responsible for

Working Capital
Working Capital (WC) is Current Assets minus Current Liabilities. It is a measure of how well you churn cash through your organization. The two largest components of WC are Accounts Receivable and Inventory. If your inventory is too high, you are probably paying cash out too early and if A/R is too high, you’re not collecting fast enough.

Working Capital Turns
WC Turns are Sales/WC. It is a measure of liquidity and how well you utilize your WC. Higher turns are better – it indicates that you are converting your investments in the business into cash quickly.

Inventory Turns
Invetory Turns are calculated by Cost of Goods Sold (COGS) / Average Inventory. Higher turns are better. 6 turns means that you turn the inventory six times per year or, conversely, you have two months of inventory on hand. This ratio indicates how quickly your business is turning over inventory. A high ratio may indicate positive factors such as good stock demand and management. A low ratio may indicate that either stock is naturally slow moving or problems such as the presence of obsolete stock or good presentation. A low ratio can also be indicative of potential stock valuation issues.

Days of Inventory
This is a sister to Inventory Turns – just expressed in days. The calculation is 365 / Inventory Turns.

Accounts Receivable Turns
Accounts Receivable (A/R) Turns are a measure of how quickly you are turning sales into cash. The calculation is net sales ÷ average trade accounts receivable. High ratio means shorter time between sales and cash collection. Lower means the opposite. If ratio is lower than peers, the quality of AR should be examined. Note that ratio may be affected by seasonal fluctuations in sales or if a large portion of sales are cash based.

Days Sales Outstanding
Probably the most prevalent of the A/R related KPI’s. There are several ways to calculate DSO, including the clawback method, but the most common is 365÷ A/R Turns. DSO is an expression of the A/R turns in terms of days rather than annual cycles. The higher the number, the greater the probability of delinquencies. Interpret this in line with the company’s credit and collection policy or payment terms.

Past Due Percent & Past Due Dollars
These are two different measurements, but I list them the together because they should always be looked at together. Past due percent is the past due dollars divided by the total A/R. Because of fluctuation in sales month to month or quarter to quarter, the percentage can be skewed one way or the other by the fluctuation in sales. When analyzing the past-dues always look at both together or you’re only getting half of the picture.

For further assistance in measuring your KPI’s check out the Financial Analysis templates in Excel from InstantController.

For monthly A/R tracking templated with graphs that are ready for your data, check out the A/R Management Bundlefrom InstantController.

– John

CashFlowABC Episode 7 – Principles of Cash Savvy Business Management

Podcast Episodes No Responses »

May 132009

Podcast: Play in new window | Download

Asset protection

Form an LLC or incorporate to protect your personal assets – Don’t comingle. Use a business entity to separate your personal and business self.

Priorities

Payroll first – pay your employees first or they will soon be former employees.

What will generate cash? Figure it out and and pay those bills first to generate the short-term cash flow and keep the cash churning.

Communication

Don’t vanish – keep the communication going with your suppliers, customers and employees. No matter how bad it is, never let them see you sweat – always be confident or they won’t be confident either.

Kill the rumor mill – as the environment gets worse, the rumor mill will take on a life of it’s own. Show confidence and kill the rumor mill before your competitors start feeding it.

Use the business’ resources

Customers – look for sales and prompt-pay opportunities.

Suppliers – look for sales, return opportunities as well as extended terms.

Cut the crap

Fire-sale the overstock – it’s time to get rid of the crap that you’ve been leaving in the back of your shop -turn it into cash!

Look at new opportunities on Ebay, Craigs List, etc..

Think unconventionally

Can I leverage what I do into other markets? This is a great opportunity to grow the breadth of your business doing the things that you already know how to do!

Cost control

Don’t throw the baby out with the bath water – control the costs rather than cut them.

Employees – take care of them! If you’ve normally bought lunch every Thursday try to continue it to avoid throwing up a red flag with your employees.

Marketing – This goes along with not throwing out the baby with the bath water. Tough times are when most companies cut back, but the ones who do the best and recover the strongest are the companies who come out of the funk with a strong marketing effort.

Loan covenants

Don’t let them bite you – If you’ve normally not had to worry about your covenents, they can sneak up on you really quick if you’re not careful.

Work with your banker – Your banker wants you to succeed too!

Cash forecasting

Start small – 4 weeks: It’s tough (and inaccurate) in the beginning until you get over the initial learning curve. As you get better at it, start extending out into the future.

Grow – 8 weeks: If you can effectively forecast cash eight weeks out, you are probably miles ahead of the competition.

Triumph – 13 weeks: 13 weeks is the goal of most cash forecasts – that’s three months! Of course, the further out it is, the less accurtate, but it at least starts to paint the picture.

— John

CashFlowABC Episode 5 – Cash Flow From Operations

Podcast Episodes No Responses »

Apr 212009

Podcast: Play in new window | Download

Lets talk about cash flow & understanding the statement of cash flow.

Revenue, or sales, accounts are the selling value of goods or services billed to the organization’s customers. Revenue, also called “the top line” because of it’s location on the income statement, is the starting point for calculating net income.

Expenses are subtracted from revenues to get net income, which is the starting point for the Statement of Cash Flow. The reason that net income is the starting point is that, in a perfect cash-only world, net income would, in fact, be your cash flow. Even in an imperfect world, net income or loss is the basis for the direction of the cash flow.

After you have the net income, you add the non-cash expenses back into net income to arrive at an “Adjusted Net Income”. This is for items such as depreciation and amortization expenses because the cash was paid out at the point of acquiring the asset and the depreciation and/or amortization is only an administrative entry that has no effect on cash.

Cash from Investing

Buying & selling of investments & fixed assets

Cash from Financing

Activities related to debt & equity

Cash from Operations

The term, “operations”, is used broadly here. It means cash generated from the regular operating of the business, doing what the business normally does in the regular course of business.

Increases in assets such as prepaid expenses and Accounts Receivable are considered a use of cash. In the case of prepaids, cash has already been spent which caused the asset to increase. An increase in Accounts Receivable is considered a use of cash as well, because Accounts Receivable is nothing more than materials, labor, overhead, and profit monetized together in the form of an invoice to the customer which is now receivable. Conversely, a decrease in prepaids would indicate that it has flowed through the Income Statement and is a source of cash. A decrease in Accounts Receivable also implies the receipt of cash, so the decrease in Accounts Receivable is considered a source of cash.

On the other side of the coin are accrued expenses and Accounts Payable. Increases in liabilities, such as Accounts Payable and accrued expenses are a source of cash because we are delaying payment on these items, thus we are able to use that equivalent cash somewhere else in the business.

As an example of this, think about a $150 invoice from an electrician to fix a light switch. The work is performed in March and you have net 30 terms. In the Statement of Cash Flows, the effect of the $150 in March is to reduce net income by $150 and, because you have net 30 terms, it would be a source of cash in Accounts Payable because you didn’t pay for the expense. The effect on cash in March is zero and is shown by a “use” in the reduced net income and a “source” in the increased Accounts Payable. In April, when the bill is paid, Accounts Payable is reduced which becomes a use of cash on the Statement of Cash Flows.

Operational Impact

Inventory is an asset so it’s a good thing, right? What about Accounts Receivable, or overall working capital? Yes and no to all of these. “But we have great terms – we get net 60 days!” Great!… but while extended terms for Accounts Payable is a great thing for your cash, too much of a good thing (Accounts Receivable, inventory, etc..) can kill a business.

Many private companies have three months, or more, of raw material inventory on hand, two weeks in work-in-process, six weeks in finished goods, and then they have sixty days of sales outstanding in their Accounts Receivable. In this scenario, you bring material in and it will be seven months before you turn it into cash (3 months + two weeks + six weeks + 60 days). If the firms’ suppliers give net 30 terms, then it’s down to six months. These numbers are very common and in this situation, the company has to have the ability to finance its’ self for the six or seven month period before the company sees the cash for the product that it just brought in last month.

For more on understanding cash flow, see Understanding Cash Flow fom Instant Controller.

Also mentioned in the episode are the books, The Goal, and The Great Game of Business. Click here for more details.

CashFlowABC Episode 3 – Effective AR Management

Podcast Episodes No Responses »

Apr 102009

Podcast: Play in new window | Download

This episode of CashFlow ABC is on effective AR management.

Accounts Receivable is one of the largest components of working capital for most companies, and the one most easily turned into cash.

We highlight and discuss the essentials to maximize your current and future cash flow through accounts receivable.

1. Measure, analyze, improve
   a. If you don’t measure, it won’t improve
   b. Accountability & incentives
   c. Cash flow from operations
   d. Percentage past due
   e. Dollars past due

2. Tools
    a. Spreadsheet
    b. Graphs
    c. Credit policy
       i.   Credit application
       ii. Personal guarantee
       iii. Credit checks
       iv. Credit limits

2A. AR Management Bundle

3. Develop a process
      a. Pro-active calling
      b. Past due calling
      c. Credit hold
      d. COD/CIA
      e. Positive cash flow
      f. Prompt pay discounts
      g. Records & notes
      h. Letter writing services
      j. Collection agencies
            i. Commission goes up with age

4. Risk management
      a. Credit limits
      b. Credit insurance
      b. UCC filings
      c. Consignment
            i.   Doesn’t belong in risk management
            ii. Increased risk limited to stock value
            iii. Increased sales
            iv. Leverage for UCC filing
      d. New customers
            i.   Customers fleeing their past due accts
            ii.   Financials
            iv. Do they use asset based lending or factoring?

5. Customer relations
      a. Think win/win
      b. Positive cash flow
      c. No news is not good news
      d. Little things matter

We welcome your comments and participation.

– John

Older Entries