Cash Flow A Concern with a Solution

Want To A recent survey of business owners showed that their biggest problem today is Cash Flow The “how to” improve this is all over the place If you have the “want to” the following provides some ideas about the “how to”

You cannot manage what you don’t measure

6 Levers to Pull First there are 6 levers that affect Cash Flow they are: Sales or Volume % Price % COGS Cost of goods sold % Accounts Receivable days Accounts payable days Inventory days  

Calculate A/R Days Outstanding DSO = Days sales outstanding - measures the time it takes a company to collect account receivables from credit sales. It provides a good understanding of the effectiveness of the account receivable collection policies and staff in charge of executing on those policies. The formula to calculate Day Sales Outstanding is: (Total Receivables/Total Credit Sales) x Number of Days in the measurement period = Day Sales Outstanding Example of DSO: Total Receivables = $5,000,000.00 Total Credit Sales = $10,000,000.00 Number of days in period = 90 (5,000,000.00/10,000,000.00) X 90 = 45 days (DSO)

Days of Inventory (DIO): This addresses the question of how many days it takes to sell the entire inventory. The smaller this number is, the better. Formula: DIO = *Average inventory/(COGS /Days) *Average Inventory = (beginning inventory + ending inventory for a period of time)/2

OR - Inventory Days Inventory Turnover = Cost Of Goods Sold ÷ Average Inventory Inventory is one of the most controllable asset investments. Inventory turnover is an indication of the velocity with which inventory investment moves through the business. Inventory Holding Period = 365 Days ÷ Inventory Turnover The inventory holding period reflects how many days of inventory are on hand. Managers and owners must be concerned with a holding period that is longer than necessary due to the high costs of capital tied up in excess inventory. On the other hand, reducing inventory levels too much could result in lost sales if certain products are not available when the customer wants them.

Days of Payables Outstanding Formula: DPO = accounts payable / (cost of goods sold/ *Days ) *Days are according to period looked at, typically 90 or 365

Greg’s Numbers So let’s look at fictional company Greg’s Distribution Sales $1,000,000 Credit sales $800,000 COGS $500,000 A/R $69,000 Inventory $116,000 A/P $48,000

What’s Good

What’s Good

Quick Ratio Quick Ratio = (Cash + Accounts Receivable) ÷ Current Liabilities The quick ratio measures a company's ability to pay its current liabilities from its most liquid assets, assets that can be quickly converted to cash to pay bills. Inventory is the least liquid current asset and is excluded from this calculation. A quick ratio of at least 1.0 reflects traditional thinking regarding liquidity.

Greg’s Quick Ratio $45,400 + 68,800 /85,313 = 1.33 Where 1 or more is good

1% or 1 day Change

Managing DOI To ensure proper inventory performance, management needs to adhere to the following program: • Buy in proper quantities • Work with fewer suppliers on a more meaningful basis • Monitor performance of each item closely • Clear dead items out of the assortment • Insure adequate shrinkage control procedures

A/R To ensure that accounts receivable balances are controlled effectively, the firm should focus on several issues: • Developing appropriate policies to maintain credit as a sales generation tool • Regular follow-up on past due accounts rather than having episodic “collection campaigns” • The use of collection techniques that are friendly, but persistent • Take credit card payments, set up ACH payments, with permission capture credit card info and auto bill

Gross Margin The old adage is still true – buy low, sell high. However, in improving gross margin performance the issue is somewhat more complex: • Buy effectively A lower cost of goods is almost always obtained by buying a larger quantity. However, overbuying creates a number of other problems. The challenge is to buy effectively. • Control internal operations This involves a number of issues such as mark-downs, obsolete goods, inventory shrinkage, and accounting errors. • Sell at appropriate prices In a competitive environment, some items are extremely price sensitive and must be priced to maximize sales and strengthen the company’s competitive position. Other items are much less price competitive and represent major margin enhancement opportunities. Proper pricing of all items is essential.

Set Goals Write down your new goals for each item The Actions you need to take and focus upon will be obvious Make an individual in your company Accountable for each of the Actions you have identified Identify what each employee can do to effect the new goals – Talk about cash and how what they do effects it Follow up and ensure they are implemented Measure and publish the progress and reward the attainment of the Goals