Cash Flow manage it or drown by WeberBurdette

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CASH FLOW – THE DEMISE OF COMPANIES

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Introduction

Creating Great

Great – We have all heard of the expression ‘cash is king’ but so few companies actually manage cashCreating effectively or Relationships even Relationships – Coaching – Time take cash flow seriously. The number one reason for any company or organization going bankrupt is –lack cash. Coaching Timeof Management Management 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 888-416-1088 valuable advice is all too often ignored. 888-416-1088 Please call to book Is this advice ignored deliberately or out of ignorance? Is it ignored because the executives involved do not fully Please call to your coaching understand what elements of the organization effect cash flow? book your session. coaching session.

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 Email:then Email: ana@yours123.com 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.

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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? © ANA WEBER & MICHAEL BURDETTE 2011

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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 IRVINE, CA. IRVINE, CA. 92612 flow and grow with time. 92612

Trust Creating Great Creating Great Relationships – We are living through challenging times and technology is very advanced and yet a promise must be honored, a Relationships – Coaching – Time hand shake needs to be considered as a commitment and must be honored. Therefore when Coaching we respect – Timethese Management Management areas and are trusted we have CREDIBILITY AND CREDIT.

The Weberburdette Cash Wheel

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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

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SCENARIO 1 – LOW PROFIT AND POOR DEBTOR MANAGEMENT Sales Vs Profit History

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Creating Great Creating Great Relationships – Relationships – Jun-06 Jun-05 Coaching – Time Coaching – Time Management 20,000,000 25,000,000 Management 430,000 487,500

Year Sales Profit

Jun-00 Jun-01 Jun-02 Jun-03 Jun-04 12,000,000 12,500,000 13,000,000 15,000,000 13,000,000 720,000 500,000 390,000 375,000 780,000

Year Sales Profit as % of sales

Jun-00 Jun-01 Jun-02 Jun-03 Jun-04 Jun-05 Jun-06 888-416-1088 888-416-108825,000,000 12,000,000 12,500,000 13,000,000 15,000,000 13,000,000 20,000,000 Please call to book 6.0% 4.0% 3.0% 2.5% 6.0% 2.2% 2.0%

Sales Vs Profit as a percentage of Sales History

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

Impact on Cash Flow - Low Profit, High Days Opening Balance Income Debtors (Debtor Days = 70) Out Goings Wages Creditors Tax Payment Net Cash (closing) Balance

Jun-05 4,000,000

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Jun-06 anahw@cox.net 465,384

16,164,384 20,205,479

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Web:Anatherelat ionshipexpert.co 8,750,000 m

7,000,000 12,570,000 15,762,500 129,000 146,250 465,384 -3,987,887

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.

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Investors expect a return, which by taking a higher risk than say cash management investment, by IRVINE, CA. 92612 IRVINE, CA. 92612 company. Not investing in your company, will be considerably higher then with a professional investment only will they expect a decent profit from your organisation, but they will be expecting a dividend to be Creating Great paid either six monthly or annually. This again adds pressure to cash flow! Creating Great Relationships – Coaching – Time Management

SCENARIO 2 – HIGH PROFIT AND POOR DEBTOR MANAGEMENT

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Sales Vs Profit History Year Sales Profit

888-416-1088 Jun-00 Jun-01 Jun-02 Jun-03 Jun-04 Jun-05 Jun-06 888-416-1088 12,000,000 12,500,000 13,000,000 15,000,000 13,000,000 20,000,000 25,000,000 Please call to book 720,000 500,000 390,000 375,000 780,000 Please 2,500,000 3,750,000 call to your coaching

Sales Vs Profit as a percentage of Sales History

Year Sales Profit as % of sales

book your session. coaching Jun-05session. Jun-06

Jun-00 Jun-01 Jun-02 Jun-03 Jun-04 12,000,000 12,500,000 13,000,000 15,000,000 13,000,000 20,000,000 25,000,000 6.0% 4.0% 3.0% 2.5% 6.0% 12.5% 15.0% Email:

Notice how much better the profit is in this table. For June 05 and June 06, let’s investigate flow, for this scenario.

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Impact on Cash Flow - improved profit. High Debtor Days Opening Balance Income Debtors (Debtor Days = 70) Out Goings Wages Creditors Tax Payment Net Cash (closing) Balance

Jun-05 4,000,000

Jun-06 1,914,384

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16,164,384 20,205,479 5,000,000 12,500,000 750,000 1,914,384

6,250,000 15,000,000 1,125,000 -255,137

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?

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SCENARIO 3 – HIGH PROFIT AND GOOD DEBTOR MANAGEMENT

Impact on Cash Flow with Good profit and Low Debtor Days Opening Balance Income Debtors (Debtor Days = 35) Out Goings Wages Creditors Tax Payment Net Cash (closing) Balance

Jun-05 4,000,000

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Jun-06 3,832,192

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18,082,192 22,602,740 5,000,000 6,250,000 12,500,000 15,000,000 750,000 1,125,000 3,832,192 4,059,932

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Doesn’t this present a good picture? In this scenario, the company has plenty of cash, has huge potential for anahw@cox.net or to 35 days instead acquisitions, and captures more market share. Debtor days in this scenario have been reduced of 70 days. The profit has been kept the same as for scenario 2. anahw@cox.net It is important to note that in order to keep the examples simple we have not included stock in these three Web:Anatherelation tables. shipexpert.com Stock turns, however, would have an impact on growth potential too. The higher the stock turns the better it will Web:Anatherelat reflect on your cash flow. ionshipexpert.co

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) Cost of Sales Operating Expenses Product and Customer Mix

Should be 32% of Sales or less Must be 70% of sales or lower Must be 15% of sales or lower 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. © ANA WEBER & MICHAEL BURDETTE 2011

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Stock (Inventory) Turns

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926124 is an There are no excuses for poor stock turns. It is simply poor management. Stock turns of less than 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, furtherCreating Great Creating Great Relationships – eroding your profit and cash position. Stock turns of four, translated, means that you turn over your stock, on Relationships – Coaching – Time average, every three months. Coaching – Time Management Management

Fixed and Variable Costs 888-416-1088 This is another neglected area of management in most companies. The fixed and variable costs determine your 888-416-1088 ‘Break-even’ point in the company. The more sales you need to break even, the lower your profit and consequently Please call to book Please call to it will the lower your cash position. Fixed costs are a danger trap. The higher the fixed costs the more difficult to yourbe coaching book your session. have good profits, no matter how efficiently you run the company. Fixed costs should be limited to a maximum of coaching session. 25% of sales.

Fixed Assets – Equipment

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So many companies today are ‘hoarders’ in that they hold onto all the assets they have. If 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. anahw@cox.net or anahw@cox.net

THE BURDETTE Cash Ratio

Web:Anatherelation We have now demonstrated the issues surrounding ‘blind sales’ but is there a tool available for managers and shipexpert.com executives to help identify the issues of cash flow? The answer is yes there is, however, we first need to determine Web:Anatherelat ionshipexpert.co what is and how do we calculate the Burdette cash ratio? m

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.

Calculating The Burdette Cash Ratio Scenario Impact on Cash Flow - Low Profit, High Debtor Days Impact on Cash Flow - improved profit. High Debtor Days Impact on Cash Flow with Good profit and Low Debtor Days

Jun-05 8.22 0.83 0.07

Jun-06 9.13 0.58 -0.06

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Burdette Cash Ratio Graph 10

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No Growth Zone 2

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0 Period 1

Period 2

Period 3

Period 4

Period 5

Period 6

-2

Period 7

Period 8

Period 9

Period 10

Period 11

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Period 12

Period 13

-4

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-6

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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 anahw@cox.net 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

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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.

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THE BURDETTE CASH MATRIX Lo >1

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Debtor Days

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

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Low Profit Quadrant IRVINE, CA. IRVINE, CA. 92612 This Quadrant, whilst indicates some serious issues regarding profit and/or cash it does show 92612 that debtors and/or stock turns are managed well. Creating Great Recommendation – Get your profit and cash sorted out, this will take time. Don’t favour business growth yet! Creating Great

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

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Recommendation – GET HELP FAST and possibly new MANAGEMENT!

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Back to the social aspects

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With customers you basically build a reliability framework - with attitude, relationships and 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 Email: indicated on your daily cash projections. Email: ana@yours123.com With vendors you need to understand their business and build the terms of payment accordingly. It is no good ana@yours123.c insisting on 14 days or 30 days if you know that is not going to happen. Build in terms with them om and pricingor according to the terms they can meet. Always offer the base price in the way of an early payment discount. The anahw@cox.net or 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 daysanahw@cox.net goes up, so must the profit. We have heard all the cries about the customer demands the terms! That is rubbish, because if your Web:Anatherelation customer drives how you manage the business then the business is in trouble. Building relationships with vendors shipexpert.com and customers is essential, together with a compelling unique selling proposition. Web:Anatherelat Practicing this program for a combined 60 years we are able to build companies from ground ionshipexpert.co up, maintain a good internal cash flow without the need of outside investors or bank loans. m 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

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Business and therefore cash flow are not just a numbers game or a game where one irresponsibly mismanages organizations based on numbers alone. Creating Great Creating Great Relationships – Relationships – Coaching – Time As managers, executives, business owners and shareholders, we have a responsibility to perform our business well Coaching – Time Management but we also have a social responsibility to employ people, which help communities to sustain Management 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 888-416-1088 relationships that will continue sustainably into the future. For your strategies to become more enriched, you need 888-416-1088 everyone in the organisation, suppliers and clients to contribute to its evolution. Please call to book This recipe is what strong nations are built on.

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GET YOUR HAND ON THAT WHEEL AND STEER YOUR ORGANIZATION TO PROSPERITY INCLEmail: UDING, CONTana@yours123.com ENTED ana@yours123.c STAFF, SATISFIED CLIENTS, HAPPY SUPPLIERS AND PLENTY OF BANKABLE CASH! or om or

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