Finding Cash in Your Business
Craig Alexander Orr MBA, MSc, HND
Copyright 2011 Craig Orr
Smashwords Edition
If you have access to the Internet you can jump to the enhanced content of this book by clicking on the links at the end of each chapter. The links will connect you with the podcast, the blog, presentations, the obligatory twitter feed and of course the website www.craigscopy.com.
Any trademarks, service marks, product names or named features are assumed to be the property of their respective owners, and are used only for reference. There is no implied endorsement if they are used.
Finally, use your head. Nothing in this book is intended to replace common sense, legal, medical or other professional advice, and is meant to inform and entertain the reader. So have fun with the Finding Cash in Your Business, and make your Cash Flow.
Smashwords Edition, License Notes
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The idea for this book arose from a desire to clear away the mystique of cash management, make you aware of it’s importance, especially as we live through a Global Credit Crunch, and provide you with the tools to better manage cash in your business.
Cash is the lifeblood of any business and this book provides insight, guidance and steps to help you take a look under the skin of your business to reveal just how well the cash is pumping through your company’s arteries.
This book was written after investigating the Communications industry where a lack of proper cash management brought the demise of many a company. As I write we are in the grip of the Global Credit Crunch and it is the turn of the banks to declare their incompetence in handling your cash.
It may be that your Finance Director has asked you to reduce headcount to conserve cash, and you are considering your options.
Stop.
Put a value next to these questions:
How much did it cost to selectively recruit the best people?
How much did it cost to train our people?
How much will it cost to release them?
What direct message does this send out to our customers?
What leverage does it give to our competitors?
What does it do for company morale?
This book is aimed at helping you to find the Cash hidden within your business, stopping the need for a programme of corporate liposuction. Remember, 90% of people on crash diets end up putting the weight back on within a short period of time.
This book combined with the Internet enhanced content provides you with the tools to identify areas where you can generate more cash from existing turnover, improve the way your business handles cash, create competitive differentiation, attract additional funding and secure the longevity of your business.
Through the great depression Ford bucked the trend and grew through acquisition and expansion to emerge as a world leader in Car manufacture. In the last recession I was based in Singapore and what I saw was quite extraordinary while most countries were reducing infrastructure spend, Singapore accelerated theirs. Supply had outstripped demand; it was the best time to buy, so Singapore invested heavily to create an infrastructure that would see them emerge the downturn as a global powerhouse. The question that I have for you is “how does your company want to emerge from the global recession?” Does it just want to contract and survive or invest and emerge as a market leader?
This book will guide you to get cash in quicker, handling it better and leveraging its power. Helping you to perform keyhole surgery on your business before major surgery is required.
I am grateful to all those who have helped develop my thinking during the researching and writing of this book.
I am particularly grateful to my wife Karen and my daughters Emily, and Charlotte for affording me the time to write this book. I have spent too much time in the study and not enough time with you all … Daddy is now home
Chapter 1 - “Turnover is Vanity, Profit Sanity and Cash is reality!”
Chapter 2 - The Working Capital Cycle
Chapter 3 - WCC within Your Market
Chapter 4 - WCC within Your Company
Chapter 5 - Your Company’s health check
Chapter 6 - Your Company’s Internal Accounts
Chapter 7 - Cash contribution by product
Chapter 8 - Mapping out Cash usage by product
Chapter 10 - Cash in Your Business
Credit crunch: a sudden reduction in the general availability of loans/credit, or a sudden increase in the cost of obtaining loans from the bank.
Chapter 1
“Turnover is Vanity, Profit Sanity and Cash is reality!”
Every Business needs to come to the realisation that even whilst Sales and Profits continue to soar creating demand for expansion, the absence of Cash just once could dismantle your business like someone blowing on a house of cards.
Finding Money in Unusual places
If I find a coin on the floor in my business how much is it worth? Well says the External Auditor that depends on where you found it. If you found it in the treasury before it was used to make any payments it is worth the face value minus any bank interest. If you found on the shop floor it is worth the face value minus the commission and the costs to manufacture. If you found it in the accounts department after the creditors and debtors then it is worth its weight in Gold. Oh, and if you found it anywhere else its mine!
A coin found in the cash flow cycle is worth roughly 3 times its value in Sales.
If a business has a profit margin of 33% then every £1 found is equivalent to a new sales value of £3, assuming that the new sale is paid for promptly.
Top tip: Don’t wait for a business recovery before trying to improve the cash flow
In recognition that an appreciation of all things financial is both important and impossible, this book has been written for you. Yes. If you have picked up this book it means only one thing you are interested in improving your company’s cash flow, and this book has you in mind. Each chapter of the book starts with a keyword or phrase definition and includes a memory enhancing top tip; both are included in a summary guide at the back of the book. Over the course of this book you will be shown how to prioritise your investigations into where cash seepages are most likely to occur, and be provide with the tools to improve the cash flow cycle within your business.
Cash cannot bring you happiness but it sure makes a good down payment.
The banks are blaming the growing shortage of credit on the fear that many more loans will go bad. There has been a surge in the number of borrowers unable to keep up repayments. Lending is drying up as banks re-capitalise. Banks are radically cutting back on the risks they are willing to take. Is it any wonder that companies are struggling to raise funding in the paralysed money market?
The good news is that growing your business need not be on the back of a bank loan, improving your cash flows will provide you with cash to invest in growth.
Wacky places to look for the cash
Lets get started with our treasure hunt. The Cash Flow Formula is a structured approach to looking for cash in your business. It employs a number of business management techniques that systematically help you uncover cash and inject it back into your business.
The figure below is a graphical view of the Cash Flow Formula. Used correctly it will help you to pinpoint, analyse, and prioritise finding additional cash within your business.
The 7 steps of the investigation are carried out into:
Competitors
Cash Flow by Company
Business Model
Internal Accounts
Product contribution
Cash Flow by Product/Service
Credit control.
So switch on your metal detector and lets get going.
Don’t worry if you don’t understand all of the terms used in the steps above they will be explained in detail as you go through the book using case study examples.
Please note: This book is kept relevant by using public domain information that can be replicated, and where data of a more sensitive nature is used it has been massaged to provide insight into the techniques whilst protecting the innocent and guilty alike.
The Figure below shows the finely balanced structure representing the building blocks of the cash flow cycle within your organisation. Each building block has the potential to release cash back into the business, making the hard earned cash work harder for you in achieving your business objectives. These building blocks will be investigated in detail in chapter 4 of this book.
Conclusion
The key objective of this book is to provide you with a structured framework that you can use to find and release cash in your business. Working through the Cash Flow Formula’s 7 steps you will gain new insight into how Cash is managed within your business, and enable you to make recommendations on how to better handle cash flows. Our objective is to make the Working Capital Cycle (WCC) shorter and ensure cash is constantly generating new revenue.
Over the course of this book you will identify areas of cash seepage, begin to find money you never new you had, extract more profit from existing turnover, attract new investment, and off course spot those Chinchillas.
The credit crunch is making a dramatic impact on all businesses none are immune. Capital rationing means that once banks get cash in they are tenaciously gripping it.
Now is the time to look for cash in your Business, find it, handle it well and look for the golden opportunities it creates.
For Internet enhanced content go to:
Working capital: current assets minus current liabilities.
Chapter 2
The Celebrity pacer
You are running in a pack of 52,000 people and you hear someone say that a celebrity is behind you, and the ripple effect of voices spreads the news. People are stumbling as they rubber neck the celeb. You turn, glance, not to stare just to make sure you know what they look like without the makeup and see if the camera has been lying. She does look a lot smaller in real life. At the same time those tightly bunched around you do the same and give each other a knowing glance. Proof positive, you can now confirm it actually is her and she sweats just like you. She is running the Great North Runs 13.1miles just like you. You and those around her are elated you have a new spring in your step and she is running just like you. If she can do it you can too, after all she is running just like you and this could be your chance to be on TV.
Here is where I burst your bubble. That celeb is not running just like you – you see unlike you they have an anonymous helper, the pacer, who’s job is to stay incognito and harness all that the celebrity can do and make it go further. We all have our natural limits those that we are comfortable with. The pacer takes those limits and uses his experience to focus effort on achieving the required goals. Next time you see a celeb run pay attention to the runner next to them who hasn’t even broken sweat and remind yourself with the right help that could be you.
You can generate more cash from existing turnover; all you need is the right focus.
Generating more Cash from Existing Turnover
This book is the pacer providing you with the focus to be able to generate more cash from existing turnover. There are many areas in a business where cash can bleed and this book provides guidance on where to look and how to rectify those seepages.
So why is Cash flow important to my business? Well once you understand cash flow you will be able to unravel the mystery of why many businesses go bust with healthy order books.
So important is the cycle of cash around your business operations that a specific definition is used to describe it: called the Working Capital Cycle or WCC for short.
WCC shows the cash coming into the business, what happens to it while the business has it and then where it goes.
Top tip: understand your business’s working capital cycle
The working capital cycle
Now you are looking at figure below wondering what all the fuss is about. Is it that simple? Yes, however, here is the sharp edge ‘if cash does not cycle around as shown in the diagram the business model ceases to work, and the company goes bust’.
Working capital is vital to any business - it is the difference between a company’s short-term assets and liabilities. It is a bit like a friend lending you money but subsequently needing it back in a hurry. Question is can you pay the friend back. The principle short-term assets are cash, accounts receivable (customer’s unpaid bills), and inventories of raw materials and finished goods. The principle short-term liabilities are accounts payable (bills that the company has not paid yet). Working capital is the funds required to pay the day-to-day bills, wages and so on.
Time lag
It is imperative that your company manages its working capital carefully. This is particularly true where there is a substantial time lag between making the product and receiving the money for it. In this situation the company has paid out all the costs associated with making the product (labour, raw materials and so on) but not yet received any money for it. The company must ensure that it has enough cash to tide it over until payment for the product is received. The time between receiving payment for goods or services is usually done with a Bank loan at the prevailing interest rate.
Between each stage of this working capital cycle there is a time delay. For some businesses this will be very long where it takes them a long time to make and sell the product. Drug companies provide arguably the best examples of a long-term return on investment. They will need a substantial amount of working capital to survive. Other companies will receive their cash very quickly after paying out for raw materials, and in some cases such as Supermarkets even before the raw materials are paid for; these types of companies will require less working capital to survive.
Cash flow forecasting
All businesses need to plan how much cash they are going to require. The best way of doing this is a cash flow forecast. Cash flow from normal operations is defined as sales less cost of goods sold, other costs and taxes. A company that has been trading for a long time will have a sound understanding of the cash flow requirements based on the historical demand, whereas a start-up company will require access to short term cash to meet unforeseen requirements until the business case forecasted revenues are achieved.
The table above is a simplified cash flow statement for a start up shoe repair business. The forecasted Cash In/Sales will have been based on a number of quantified assumptions, and in this case they have been overoptimistic on Sales. As the business gets established the actual closing balance will become easier to predict. The bottom line is that for the business to survive the closing balance must always be positive. If an additional loan facility had not been set up in advance this business would have gone bust in its first month of trading.
Relevance
Throughout this book the communications sector will be used to provide typical cash management examples and highlight areas for improvement in handling cash. The communications sector is an area I understand well. I have worked in it for over 20 years. It provides extreme examples of capital-intensive businesses, which have long pay back periods combined with the potential of good profit margins.
Just in case you are beginning to think this book is not relevant to my business imagine reading the following news article…
“The Communications Sector continues to face pricing pressures and declining revenue growth. Communications Companies have responded by cutting back on capital and operating expenditures in an attempt to speed up free cash flow.”
…and then replace Communications with your own sector of operations. If your Company’s sector does not fit into the text, you are in a rare privileged position. This book will provide you with the armoury to protect your business formed by learning from past failures.
The Communications sector
Within the Communications sector companies have suffered from accelerated asset write-downs, redundancy programmes and in some cases insolvency. Communications companies are still trying to deal with pricing pressures, particularly from the wholesale market, and competition from previously distressed companies emerging from Chapter 11 bankruptcy protection proceedings.
In 2011 the Communications sector is in a very different position than in 2000. Banks no longer role out the red carpet, and investors want to see if the companies they invested in are capable of generating free cash flow (FCF) before they decide to invest any more money.