by Barry Brownlow
As appeared in the Spring 2002 issue of Biz Magazine, Town Publishing.
Lou Albanese, chairman of The TMF Group in Stoney Creek, once told me that "cash flow [the amount generated by a business] is the lifeblood of your business. Every business needs a regular, consistent cash flow in order to meet its commitments." Simply put, no money, no funny. The advantage of a strong and consistent cash flow is perhaps best explained by Roger Couldrey, in charge of strategic planning at Orlick Industries in Hamilton. "Build your war chest... think of what you could do at a time when you have cash and no one else does."
Knowing how to build cash flow is vitally important. Tricia Hellingman, president of Hamilton's Hellingman Communications, keeps a close eye on that most important pulse of her business. "We have excellent clients and they fully appreciate our requirement that invoices are paid promptly. Virtually all our clients pay within 30 days or shortly afterward. In the rare instances where payments are delayed, we follow up by mailing a reminder notice around the 30-day point, then we'll make a telephone call a couple of weeks afterward if we still haven't received payment." Hellingman continues: "We are selective about the clients we serve and we won't take on clients who cannot respect us enough to pay when our work has been completed. And by the same token, we pay our suppliers promptly. I believe it is essential to extend the same courtesy to our suppliers as we expect from our clients."
Harry Mitchell, president of Hamilton's Armagh Cash Register Limited, agrees with Hellingman. "Sometimes a big company that you would expect to have the best cash flow turns out to be the slowest payer. That's someone you are probably better off not dealing with."
During uncertain times - like the period we're currently in - cash flow takes on all the more importance in the day-to-day running of your company. That's when a bank can be of service. I've enjoyed positive experiences recently with the Bank of Montreal in Hamilton in dealing with some of my clients. In a number of circumstances the bank was understanding and helpful, giving clients more resources than they needed at the time. But that does not happen automatically; these same clients had done the footwork in advance and paid close attention to the bank's cash flow covenants.
All successful business owners see cash flow as important for two reasons. First, to ensure the day-to-day health and well-being of their business and, second, to establish a reliable indicator of the sale ability of their enterprise. Important partners to business, such as the bank mentioned above, use key cash flow covenants or indicators to define the quality and quantity of their relationship with their business partner.
The following questions and commentary will assist you in identifying problems you may have with your business' cash flow and help you decide on actions and a strategy to improve the situation.
Who is responsible for cash flow in your company?
Ultimately, you are. Take action immediately if you find cash flow shortcomings and meet with whoever else is responsible on a day-to-day basis. Problems in business rarely fix themselves, so you need a solution that works both immediately and in the long term.
How can you increase the amount of money available to your company and reduce the cost of that money while further improving the quality of your relationship with the person who services your account?
This question concerns your relationship with your bank. It is important to keep front and centre the fact that banks do not want to work with just anyone. Like you, they want a relationship with a winner. With that in mind, take steps to understand and improve the cash flow covenants to which your bank pays attention - cash coverage, debt-to-worth and working capital. Strive to move your ratios to at least the upper quartile performance across your industry. The bank will soon see you as the best bet in town.
Are you purchasing equipment, land holdings or other capital items with operating funds?
If you are, big mistake. Different assets require different financing. Operating funds are the cash, supplemented by your bank operating line, with which you run your day-to-day business. Hands off! Instead, purchase equipment, land and buildings with either your surplus cash or with longer-term financing such as term loans, mortgages or leases that are paid off over a longer period of time. Failing to do so puts your cash flow at high risk.
Why don't customers pay you on time?
Ask them and find out; they will tell you. Most often it is because you have not qualified your customers. Instead you accept everyone equally. Perhaps you are also selling them something they perceive as being of little value, or you may be seen as having nothing new in your offering. Finally, are you causing them problems with the delivery system you use? Again, find out.
Should you change your customers?
Maybe you have the wrong customers. Your business is positioned only to serve certain customers, not everyone. Find out who are the right customers by making a list of your top five customers, their common characteristics and their main competitors. These should be the qualities of all your future customers, and those competitors can be your customers, too. Go out and get them - attend a trade show where these companies will be exhibiting, and make those calls!
Should you change the products and services you sell your customers?
Maybe the value you once stood for is gone or diminished by competition. Survey your key customers and discover what it is that they want. Use this knowledge to modify or change your product and services accordingly.
Should you change the delivery of products and services to customers?
Ask yourself why your customers should pay for multiple delivery layers and poor service. Reduce delivery layers (middle men), cut costs and improve service.
Do you have enough equity to handle explosive growth?
Are you a big piece of a small pie or a small pie that has the potential of becoming a much larger one? The opportunity for explosive growth - that is, the opportunity to make that pie a larger one - can be seductive. If you think you can make it bigger and grow, remember you cannot do it without money. Should you not have cash in reserve, there is a real possibility that growing will put too much pressure on cash flow, risking failure. Identify and obtain the equity money you will need before the explosive growth is attempted or grow at a slower pace. That will allow you to generate the money you need from your own resources.
Do you have enough cash?
When was the last time you asked yourself: "How much is that? What is the price if I pay cash?" Many businesses will die for no other reason than they did not protect their cash. Incorporate into your strategy a savings plan that helps you build your cash faster and pay off your debts sooner. Such a strategy will cause you to make some sacrifices and tough choices, but it will be worth it. Should you do so when times get tough, others will find themselves in search of financial assistance, not you. Instead, you will capitalize on the opportunities that present themselves simply because you have money.
How much could you sell your business for today?
Unless you plan on dying in the saddle, you will have to sell or transfer ownership of your business at some point. When that time comes, you will soon realize that the value you receive from that sale or transfer is largely determined by the cash flow that your business produces. To help you understand this, take the buyer's point of view. When your business has a strong cash flow, there will be more interested buyers who will pay more for it. Unfortunately, the opposite is also true. By doing a rough cash flow value of your business each year, you can put yourself on the road to making your value grow. The message is that by knowing what your cash flow is, you can begin to grow it and increase the value of your business.