Cash Flow manage it or drown

© ANA WEBER & MICHAEL BURDETTE 2011 www.weberburdette.com

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CASH FLOW – THE DEMISE OF COMPANIES

Introduction We have all heard of the expression ‘cash is king’ but so few companies actually manage cash effectively or even

take cash flow seriously. The number one reason for any company or organization going bankrupt is lack of cash.

Why it is that so little emphasis is placed on managing cash flow? In defence of accountants, most will tell

executives that a positive cash position is essential in the organisation’s ability to survive, sadly however, this

valuable advice is all too often ignored.

Is this advice ignored deliberately or out of ignorance? Is it ignored because the executives involved do not fully

understand what elements of the organization effect cash flow?

In our experience the advice is rarely ignored deliberately, but is definitely a combination of ignorance, lack of daily

cash projections and a lack of understanding of the processes that affect cash flow. The million dollar question then

is what exactly is the problem?

The problem is very simply two fold:

A lack of the social aspects of cash flow.

A lack of understanding the operating elements affecting cash flow.

Social Aspects of cash flow

Basically CASH FLOW is an A.R.T.

The 3 most crucial social ingredients to keep a positive and healthy cash flow while building the business and maintaining the business is:

A - Attitude R - Relationships T – Trust

Attitude

The individual handling of cash flow is a huge role in the company. Just like the anesthesiologist putting the person to sleep before and during surgery. Applying a positive, open and passionate attitude towards money and the overall power and circulation of money is the first essential key. Attitude will shift the "so called' cash flow position from stressful to manageable relationships.

Relationships

Relationships are the heart of the business - without relationships there is no business and there is no money. Running a small company or a big organization one must learn and build strong, lasting and honorable relationships with bankers, customers, vendors, etc. You must go the extra mile and follow up on these relationships and keep them alive; an example; ask the vendor or customer about some of their personal things like when did you move to..........where did you go to school.........do you like to travel?



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Slowly you make them important and interested, try not to be interesting but interested. Find out in genuine fashion their birthday, their favorite hobby, etc. Call them and wish them a happy birthday and the relationship will flow and grow with time.

Trust

We are living through challenging times and technology is very advanced and yet a promise must be honored, a hand shake needs to be considered as a commitment and must be honored. Therefore when we respect these areas and are trusted we have CREDIBILITY AND CREDIT.

The Weberburdette Cash Wheel

The Weberburdette Cash Wheel uniquely combines the social as well as the operational elements of cash flow. The ART symbolizes the social aspects of cash flow and the others symbolize the operational aspects. We have looked into the social aspects of cash flow so now we will look into the operating elements affecting cash flow in detail.

Operating elements affecting cash flow Before we start anything, the big question is;

Do you have daily cash projections?

If the answer is no, then get this started before you do anything else. Nothing is more important, I mean nothing!

We have very simple templates available, just contact our office or visit our website at www.weberburdette.com

http://www.weberburdette.com/



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SCENARIO 1 – LOW PROFIT AND POOR DEBTOR MANAGEMENT

From June 04 to June 06, this company has almost doubled sales. At what cost to cash has this happened?

In this example, the cash position has decreased by almost 8,000,000. (Compare opening balance of 04 to closing

balance o6) This table demonstrates the sales growth they have achieved, required almost 4,000,000 in additional

funds. This is a typical scenario where profit is too low, debtors are too high and we have assumed they carry no

stock!

Their cash position is now in danger of sending them into bankruptcy.

This is an all too familiar scenario, particularly with small to medium enterprises, however, it exists within

some large corporate organizations too.

The way most organizations try to cope with their own mismanagement of cash flow is by holding back

payment of their creditors, borrowing from banks or look for investment funding. All this does is make

their cash situation even worse, particularly borrowing from the bank, as this further reduces profit

(interest) and puts far greater pressure on cash flow (it needs to be paid back on a regular basis).

Delaying paying creditors, increases the risk of stopping supply, a creditor placing you in receivership or

being black listed as a creditor.

Jun-05 Jun-06

Opening Balance 4,000,000 465,384

Income

Debtors (Debtor Days = 70) 16,164,384 20,205,479

Out Goings

Wages 7,000,000 8,750,000

Creditors 12,570,000 15,762,500

Tax Payment 129,000 146,250

Net Cash (closing) Balance 465,384 -3,987,887

Impact on Cash Flow - Low Profit, High Debtor

Days

Year Jun-00 Jun-01 Jun-02 Jun-03 Jun-04 Jun-05 Jun-06

Sales 12,000,000 12,500,000 13,000,000 15,000,000 13,000,000 20,000,000 25,000,000

Profit 720,000 500,000 390,000 375,000 780,000 430,000 487,500


Sales 12,000,000 12,500,000 13,000,000 15,000,000 13,000,000 20,000,000 25,000,000

Profit as % of sales 6.0% 4.0% 3.0% 2.5% 6.0% 2.2% 2.0%

Sales Vs Profit History

Sales Vs Profit as a percentage of Sales History



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Investors expect a return, which by taking a higher risk than say cash management investment, by

investing in your company, will be considerably higher then with a professional investment company. Not

only will they expect a decent profit from your organisation, but they will be expecting a dividend to be

paid either six monthly or annually. This again adds pressure to cash flow!

SCENARIO 2 – HIGH PROFIT AND POOR DEBTOR MANAGEMENT

Notice how much better the profit is in this table. For June 05 and June 06, let’s investigate the impact on cash

flow, for this scenario.

The cash position looks considerably better in this case, although they still need an additional $255,000 to pay all

their debts. Whilst not advisable, they would have a better chance of securing a loan to compensate for the

shortfall in cash. The cells in green indicate where the profit improvement was achieved, namely, in lower wages

and lower costs, resulting in lower creditors. Note too that we have included corporate tax in our calculations. The

downside of making more money is that we pay more tax!

It is a total nonsense when executives say, ‘I keep my profit low in order to minimise tax’. This is not only a recipe

for disaster it is also irresponsible.

The simple facts are that unless you make a decent profit, you will experience cash problems. So don’t expect any

‘compassion’ from your accountant, the tax department or the banks.

What does struggling with cash flow do for staff morale?

Jun-05 Jun-06

Opening Balance 4,000,000 1,914,384

Income


Out Goings

Wages 5,000,000 6,250,000

Creditors 12,500,000 15,000,000

Tax Payment 750,000 1,125,000

Net Cash (closing) Balance 1,914,384 -255,137

Impact on Cash Flow - improved profit. High

Debtor Days


Sales 12,000,000 12,500,000 13,000,000 15,000,000 13,000,000 20,000,000 25,000,000

Profit 720,000 500,000 390,000 375,000 780,000 2,500,000 3,750,000


Sales 12,000,000 12,500,000 13,000,000 15,000,000 13,000,000 20,000,000 25,000,000

Profit as % of sales 6.0% 4.0% 3.0% 2.5% 6.0% 12.5% 15.0%

Sales Vs Profit History

Sales Vs Profit as a percentage of Sales History



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SCENARIO 3 – HIGH PROFIT AND GOOD DEBTOR MANAGEMENT

Doesn’t this present a good picture? In this scenario, the company has plenty of cash, has huge potential for

acquisitions, and captures more market share. Debtor days in this scenario have been reduced to 35 days instead of

70 days. The profit has been kept the same as for scenario 2.

It is important to note that in order to keep the examples simple we have not included stock in these three tables.

Stock turns, however, would have an impact on growth potential too. The higher the stock turns the better it will

reflect on your cash flow.

WHAT FACTORS INFLUENCE CASH FLOW?

Profit before Tax

Profit is critical to healthy cash flow. Anything less than 10% profit (before tax) as a percentage of sales is the first

sign cash is under pressure. In fact a PBT (profit before tax) of 15% or higher is desirable. If your profit is below 10%

then FIRST get your company in order before doing anything else. So effectively, introduce a ‘profit growth

program’ before a sales growth program.

Some typical areas to investigate how to improve profit are;

Wages and Salaries (Gross) Should be 32% of Sales or less Cost of Sales Must be 70% of sales or lower Operating Expenses Must be 15% of sales or lower Product and Customer Mix Very often profit can be increased without increasing sales

Debtors

Bad debtor management is the most common area of mismanagement. Debtor days should be between 30 to 45

days. In some industries (such as Automotive, Publishing and supplying to Government departments), this is

difficult to achieve, however, look for alternatives solutions. If you are in an industry, where it is difficult to get

debtor days to between 30 to 45 days, then the only way to compensate for this is with increased profit. In

addition, you need to manage your costs, marketing and fixed costs accordingly. What debtor days of say 70 means

is that you are financing your clients for 70 days, whilst you still have to pay wages, creditors, taxes and utilities,

before recovering their money.

Jun-05 Jun-06

Opening Balance 4,000,000 3,832,192

Income


Out Goings

Wages 5,000,000 6,250,000

Creditors 12,500,000 15,000,000

Tax Payment 750,000 1,125,000

Net Cash (closing) Balance 3,832,192 4,059,932

Impact on Cash Flow with Good profit and Low

Debtor Days



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Stock (Inventory) Turns

There are no excuses for poor stock turns. It is simply poor management. Stock turns of less than 4 is an

unacceptable position and it will always be difficult to maintain good cash flow. In addition to that the higher your

stock turns are, the more likely it is that you will write off more stock at the end of the financial year, further

eroding your profit and cash position. Stock turns of four, translated, means that you turn over your stock, on

average, every three months.

Fixed and Variable Costs

This is another neglected area of management in most companies. The fixed and variable costs determine your

‘Break-even’ point in the company. The more sales you need to break even, the lower your profit and consequently

the lower your cash position. Fixed costs are a danger trap. The higher the fixed costs the more difficult it will be to

have good profits, no matter how efficiently you run the company. Fixed costs should be limited to a maximum of

25% of sales.

Fixed Assets – Equipment

So many companies today are ‘hoarders’ in that they hold onto all the assets they have. If an asset is not being used

or used efficiently, sell it. For all value adding assets, there should be a regular review of each asset’s break-even

point. If an asset is not earning its worth, sell it.

THE BURDETTE Cash Ratio

We have now demonstrated the issues surrounding ‘blind sales’ but is there a tool available for managers and

executives to help identify the issues of cash flow? The answer is yes there is, however, we first need to determine

what is and how do we calculate the Burdette cash ratio?

To calculate this ratio you need the following information,

Opening Available Cash Balance Available Closing Cash Balance Profit Before Tax

By opening cash balance, we mean, that if you have an overdraft or bank loan in place then by all means use it. The

same applies for an available closing balance.

The calculation is

Burdette Cash Ratio = (Opening Balance – Closing Balance) ÷ Profit before Tax

This is best demonstrated with an example.

Scenario Jun-05 Jun-06

Impact on Cash Flow - Low Profit, High Debtor Days 8.22 9.13

Impact on Cash Flow - improved profit. High Debtor Days 0.83 0.58

Impact on Cash Flow with Good profit and Low Debtor Days 0.07 -0.06

Calculating The Burdette Cash Ratio



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What this graph demonstrates is that if your Burdette Cash Ratio is greater than 0 (zero) then you need to look at

some issues urgently.

The higher the Cash Ratio, the greater the risk of bankruptcy.

If your figure is a NEGATIVE number, you are safe to embark on PLANNED sales and profit growth strategy.

THE BURDETTE GROWTH MATRIX

The Burdette Cash Ratio is only useful as a quick check to determine ‘are we in potential trouble’ or not. The

Burdette Growth Matrix has been developed as a simple but unique tool to help point you in the right direction as

far as what needs to be addressed before developing a business growth strategy.

REMEMBER:

If you are to GROW anything make sure you GROW, Sales, Profit AND Cash Flow Simultaneously.

Burdette Cash Ratio Graph

-6

-4

-2

0

2

4

6

8

10

Period 1 Period 2 Period 3 Period 4 Period 5 Period 6 Period 7 Period 8 Period 9 Period 10 Period 11 Period 12 Period 13 Period 14

No Growth Zone

Growth Zone



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THE BURDETTE CASH MATRIX

This simple matrix is easy to use and pinpoints where you stand in terms of growth. To use this matrix find the

point of intersection of;

1. Debtor Days and Percentage of Profit (Bottom axis and left hand axis) 2. Stock Turns and Burdette Cash Ratio (Top axis and right hand axis)

NOTE: In the services industries, where there is no inventory, we use a labour scale. Please contact us for this scale.

Growth Quadrant

This is where you want to be. If your points are in this quadrant, you have no problem in growing sales, profit and

cash, providing growth is planned, profit percentage maintained and all the other contributing factors are

managed.

Cash Management Quadrant

This Quadrant indicates that your Burdette Cash Ratio and Profit percentage are on track, however, you have

debtor and/or stock turn issues to resolve.

Recommendation – Fix the issues and enjoy good planned growth

Burdette

Cash

Ratio

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Low Profit Quadrant

This Quadrant, whilst indicates some serious issues regarding profit and/or cash it does show that debtors and/or

stock turns are managed well.

Recommendation – Get your profit and cash sorted out, this will take time. Don’t favour business growth yet!

Problem Quadrant

This quadrant is the very worst position you could be in. Everything is a mess.

Recommendation – GET HELP FAST and possibly new MANAGEMENT!

Back to the social aspects With customers you basically build a reliability framework - with attitude, relationships and trust you will get paid within the expected terms give or take an additional two weeks of when you projected payment. When you project in this fashion you eventually have a constant stream of cash flow coming in on certain days, as indicated on your daily cash projections. With vendors you need to understand their business and build the terms of payment accordingly. It is no good insisting on 14 days or 30 days if you know that is not going to happen. Build in terms with them and pricing according to the terms they can meet. Always offer the base price in the way of an early payment discount. The terms you agree to must be built into your cash forecasting. Remember cash flow is dependant on profit and debtor days in these cases, so as debtor days goes up, so must the profit. We have heard all the cries about the customer demands the terms! That is rubbish, because if your customer drives how you manage the business then the business is in trouble. Building relationships with vendors and customers is essential, together with a compelling unique selling proposition. Practicing this program for a combined 60 years we are able to build companies from ground up, maintain a good internal cash flow without the need of outside investors or bank loans.

Company A.R.T. (attitude relationships trust)

These areas must be applied towards the entire staff When you create and maintain a good attitude at work employees will go the extra mile for you and deliver much higher productivity. Give out monthly bonuses and motivational tools, based on efficiency, giving to others in terms of learning and helping, and positive attitudes. Give them a paid day off on their birthday or important wedding anniversaries. Keep the moral high, uplifted and contented - happy people create success.

Relationships

Build strong and amicable relationships with the entire staff Cross train Managers need to be hands on and teach and help and be open to questions Conduct weekly short meeting for trouble shooting areas and listen to solutions and ideas inspired by employees TRUST YOUR SERVICES AND PRODUCTS Believe in what you have if not why should anyone else Trust that you will succeed by following these steps and trust the purpose and the cause for the business.



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CONCLUSION Business and therefore cash flow are not just a numbers game or a game where one irresponsibly mismanages organizations based on numbers alone. As managers, executives, business owners and shareholders, we have a responsibility to perform our business well but we also have a social responsibility to employ people, which help communities to sustain a decent way of life, delivering opportunities for shelter, food, confidence, education and most of all to express their opinions freely. We also have a responsibility to educate, teach, and mentor our staff, customers and suppliers to create trusting relationships that will continue sustainably into the future. For your strategies to become more enriched, you need everyone in the organisation, suppliers and clients to contribute to its evolution. This recipe is what strong nations are built on.

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SSTTAAFFFF,, SSAATTIISSFFIIEEDD CCLLIIEENNTTSS,, HHAAPPPPYY SSUUPPPPLLIIEERRSS AANNDD PPLLEENNTTYY OOFF BBAANNKKAABBLLEE CCAASSHH!!

This article was written jointly by Ana Weber and Michael Burdette, accomplished authors, speakers and educators.

Cash Flow manage it or drown

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