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Managing Cash Flow Amidst Disruptions

Disruptions can happen to a business at any given time, which can turn business operations upside down. One type of business disruption is when one of your suppliers or customers files for bankruptcy.

DWH Partner, Jeremy Cosby discussed this type of business disruption in a recent interview and shared his thoughts on how businesses can navigate through this type of situation to help ensure they come out on top.

1. Proper Cash Flow Management

Cash flow is always important, even more so in times of change and transition. It is important to understand the potential scenarios that could affect the cash that you need to run your business.

Managing cash flow, whether it’s a bankruptcy, strike, pandemic, etc., and understanding the levers you can pull to control your cash flow, will help you navigate through that transition. Having good cash flow management means you have tight control over what’s going on, both in the past and the future. Doing thorough scenario planning in advance will allow you to navigate challenges when they arise.

2. Understand Different Scenarios That Could Affect Cash

A business owner needs to understand the different scenarios that could affect the cash that is needed to run the business. For example, in a supplier or customer bankruptcy, the client needs to understand how their supply chain or customer will be directly or indirectly impacted by the bankruptcy. What are the types of vehicles involved? What impact does the bankruptcy have upstream or downstream? How will I be impacted and when? How will my suppliers be impacted? Answering these questions will inform all the rest of your decisions. Typically, businesses impacted the most are the smaller suppliers (downstream) who don’t have the reserves to absorb the impact.

3. Understand the Impact of the Bankruptcy

A key element in proactively protecting your cash flow is to grasp the impact the bankruptcy will have on your business. One effective way to gain that understanding is due diligence. Due diligence must be done thoroughly and promptly. For example, if you are concerned one or more of your suppliers is financially distressed, then spend the time to develop alternative supply sources. If you are concerned a customer is financially distressed, then closely manage your outstanding accounts receivable.  Doing this proactively can put you in a better position with suppliers, with customers, and leverage tools and resources.

The quicker you understand the impact, the sooner you can take action.

4. Have a Well-Prepared Strategy

Remember that managing cash flow during a significant disruption is a temporary challenge. It requires flexibility, creativity, and strong financial planning. Having a well-prepared strategy can help your business weather the storm and emerge stronger on the other side.

DWH has helped hundreds of businesses improve liquidity by helping them understand the way cash flows through the organization from invoice to invoice. We can help you too. Book a consultation to get started.

 


Originally posted on June 1, 2021, by Jeremy Cosby
jcosby@dwhcorp.com | LinkedIn

All companies experience change.
Plan for it with us.

 

 

If you found this topic interesting, our strategic partner, JACO Advisory Group published content you may find relevant as well: “How a 13-Week Cash Flow Forecast Model Can Benefit Your Business” and “13-Week Cash Flow Forecast – A Day-to-Day Cash Management & Longer Term Operational Planning Tool

 

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Understanding Your Cash Conversion Cycle

Group of financial analysts

CCC: What Is It?

The Cash Conversion Cycle (“CCC”) is an important metric used to determine the number of days it takes a company to convert cash outflows (purchase of inventory, manufacturing expenses, etc.) into cash inflows (collections of receivables).  The longer a company’s CCC, the more working capital it will need to fund operations.  This metric is especially important when a company is evaluating the working capital needed to fund expansions, new projects, or growth.

How Is It Measured?

There are three components of the CCC. They include Days Inventory Outstanding (DIO), Days Sales Outstanding (DSO), and Days Payable Outstanding (DPO). The formulas for determining these are below:

  • DIO = (Average Inventory on Hand / Cost of Goods Sold) X Days in the Period
  • DSO = (Average Accounts Receivable / Revenue) X Days in the Period
  • DPO = (Average Accounts Payable / Cost of Goods Sold) X Days in the Period

Days in the Period are determined by what information you are using to do your calculation. For example, if you were measuring your CCC using numbers that reflected an entire year, the period would be 365 days. If you were measuring just a month, the period would be 30 days. Once you have determined your DIO, DSO, and DPO, the formula for your CCC is:

CCC = DIO + DSO – DPO

How Can I Improve My CCC?

It all starts with understanding your current state. What is the first thing you do when you are about to embark on a new journey? You look at a map and figure out where you are relative to where you want to be. You will never be able to measure progress if you do not know your starting point. Calculate the CCC for your company using the most recent financial data and the formulas provided earlier. This is your, “You Are Here,” marker.

Can you recall a time in your company’s history when cash was NOT tight?  What was the CCC leading up to and during that period? How does that compare to your current CCC? How does your CCC compare to the standards within your industry? Use the answers to these questions to guide the goal-setting process. Taking steps to improve your CCC leads to improved efficiencies for the company by converting inputs into cash. The goal is to free up working capital, and with the CCC method, you’ll be able to ensure your business has enough cash for when you need it most.

Identify & Quantify Cash Levers

As you begin to establish cash conversion goals, you will discover a variety of “levers” that can influence cash flow. Some common levers are listed below. After reviewing this list, decide which levers are most relevant to your business. Quantify the impact of each lever to determine the potential impact on cash conversion.

Sales & Marketing Levers:

  • Early Payments – Will any of your customers offer accelerated payment terms? Offer early payment discounts, as necessary.
  • Demand Planning – Can you engage with your customers planning and purchasing departments to ensure you have access to the most reliable product demand information? Structure your agreements in ways that allow you to level load your operations.
  • Discounts & Promotions – Do you have opportunities to offer discounts or promotions on slow-moving or obsolete inventory? Are there brokers available to provide immediate cash for this inventory?  Can any of this inventory be re-purposed for other sales channels or product lines?
  • Selling Excess Capacity – What areas of the business have excess capacity? Use this information to offer discounted pricing as needed to fill this capacity.

Supply Chain Levers:

  • Extended Payment Terms – Request extended payment terms from your key vendors. Remove any early-pay discount programs as applicable.
  • Material Lead Times – Evaluate long-lead material items, seeking alternate sources with shorter lead times, or assist your vendors in reducing these lead times.
  • Optimize Order Sizes – Review your planning and ordering process to ensure you are ordering in the most economical batch sizes.
  • Optimize Order Triggers – Establish parameters around raw material on-hand quantities to prevent excessive buildup of inventory. Set up replenishment systems, or vendor-managed inventory systems that allow you to reduce your liabilities.

Production Levers:

  • Production Lead Times – What are your internal production lead times for your highest-cost items? Look for bottlenecks in the process and find ways to eliminate this buildup of inventory.
  • Minimize Finished Goods Inventory – Establish parameters around finished goods inventory, highlighting areas where completed product is sitting on your shelf for more than a few days.
  • Increase Throughout – Are there bottlenecks in your production process? Use this to determine where you might need to add more capacity (human or capital resources).  Find equipment that is under-utilized, working with the sales team to bring in work that can fill this capacity.

Financing Levers:

  • Asset Management – What assets are available that can be used as collateral?
  • Negotiate Advance Rates – Negotiate with your bank to find the best inventory and receivable advance rates.
  • Micromanage Collection Process – Maintain proper oversight over your AR collection process to limit past due invoices that might become ineligible.

Make a Plan

Decide on a goal and create a path that moves you toward that goal. As with any good plan, make sure you have identified key milestones and assigned appropriate ownership to key elements of the plan. Each element should relate to the identified levers. Work through all the levers you previously identified, adjusting your plan as more information is gathered and as progress is made. Maintain clear and consistent communication within your team ensuring all opportunities are fully explored and executed.  Document and measure your progress along the way. As movement is made, priorities will change and new levers will come into play. Re-establish your current state, set new goals, and repeat the process.

Conclusion

Monitoring your cash flow can often be a daunting and nebulous task. You can use the Cash Conversion Cycle measurement as a tool to objectively monitor your company’s effectiveness in managing cash. Using the tools and steps above can help to significantly improve the liquidity of your business and reduce future risk.

 


Originally posted on June 1, 2021, by Jeremy Cosby
jcosby@dwhcorp.com | LinkedIn

All companies experience change.
Plan for it with us.

 

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Stories from a Financial Advisor

Image of a couch at home

For many people, the idea of hiring an advisor can feel intrusive, threatening, costly, or even downright unnecessary at times. As long-time advisors at DWH, we’ve heard things like…

“I’ve been in this business for 40 years. No one can tell me anything I don’t already know.”
“I don’t want someone I just met telling me how to run MY business.”
“My business is unique, and no one else does things the way we do, so your ‘standard solutions’ won’t work here.”

Although these are common sentiments, we’ve discovered that sometimes the best way to articulate the value of a good advisor is not with clever arguments, but with a story.

First Story: The Couch Maneuver 

I recently went over to a friend’s house to help him move his couch. The house was a bi-level with a small flight of stairs leading to the front door. We transported the couch down the stairs and were trying to maneuver it through the doorway; it wouldn’t budge.  We then stopped for a minute, evaluated the situation, and tried harder.  Still stuck.  After 2-3 minutes, we noticed his neighbor standing just outside the house, entertained by our efforts.  Without hesitation, he said, “move it back up one step, rotate it about 30 degrees and come back down.”  With no better options but to swallow a little bit of pride and take his suggestion, we did as he instructed.  Sure enough, within seconds, we were out of the house, and the couch was in the truck.

This wasn’t his couch, nor was this his house; in fact, I don’t think he’s ever even been inside the house.  He had a perspective we didn’t have that he could use to identify problems we couldn’t see and suggest a quick, simple solution.

Second Story: The Golf Swing

I’ve always been terrible at golf, but for some reason, I’ve noticed this year that I’m getting worse the more I play instead of better.  I was reading articles on how to improve my swing, spending more time at the range, even shopping for new clubs.  None of it mattered.  Still no improvement, in fact, the opposite.  Finally, I decided it was time for me to seek some professional help, so I signed up for an evaluation with a local professional golf coach.

After some brief discussion about the challenges I was experiencing and what I hoped to accomplish, I was directed to a special room with several cameras, four tv screens, and a giant net to hit into.  I was instructed to swing “like I normally do” and hit a few balls into the net.  Cameras from multiple angles recorded my swing so the instructor could then replay the video, dissecting my swing frame by frame.  Every element of my swing, from the setup to the backswing, contact, and follow-through, was compared to a database of “baseline” measurements generated by compiling the average swing of the top 100 professional golfers in the world.  As painful as it was to watch, it allowed me to see how my swing compares to a professional.

I’ve never actually seen my golf swing before, which makes sense as there aren’t exactly a lot of mirrors on golf courses.  Within those 90 minutes, I was able to SEE what was causing that awful slice and begin to make a plan to correct some unhealthy habits.  There was not one magical fix (unfortunately), but a couple of fundamentals that I need to practice, which will start pushing me towards a path of improvement.

Hopefully, by now you can see where I’m going with these stories…

We need trusted advisors in our business (and frankly, in all areas of our life) because a good advisor can provide a perspective only an outsider can give.  They can see things from multiple vantage points (the forest AND the trees) and make comparisons to what the best companies in the world do (a.k.a. “Best Practices”).  A good advisor will leverage the decades of experience you have in your business, or within your industry, to help you see things from a new perspective. And seeing things in a new way is the first step to breaking old habits and creating meaningful change.

When you’re ready, we’re here for you — and for the life of your business.

 

This post was originally written on August 11, 2021, by:
Jeremy Cosby, DWH Partner
jcosby@dwhcorp.com | LinkedIn

Posted on

Understanding Your Cash Conversion Cycle

Individual pointing to blog on laptop

CCC: What is it?

The Cash Conversion Cycle (“CCC”) is an important metric used to determine the number of days it takes a company to convert cash outflows (purchase of inventory, manufacturing expenses, etc.) into cash inflows (collections of receivables).  The longer a company’s CCC, the more working capital it will need to fund operations.  This metric is especially important when a company is evaluating the working capital needed to fund expansions, new projects, or growth.

How is it measured?

There are three components of the CCC. They include Days Inventory Outstanding (DIO), Days Sales Outstanding (DSO), and Days Payable Outstanding (DPO).  The formulas for determining these are below:

  • DIO = (Average Inventory on Hand / Cost of Goods Sold) X Days in the Period*
  • DSO = (Average Accounts Receivable / Revenue) X Days in the Period
  • DPO = (Average Accounts Payable / Cost of Goods Sold) X Days in the Period

*Days in the Period are determined by what information you are using to do your calculation.  For example, if you were measuring your CCC using numbers that reflected an entire year, the period would be 365 days.  If you were measuring just a month, the period would be 30 days.

Once you have determined your DIO, DSO, and DPO, the formula for your CCC is: CCC = DIO + DSO – DPO

Example

Below is an example of the calculation for the CCC of a mid-sized manufacturing company.

How can I improve my CCC?

Improving your CCC means improving the efficiency with which your company converts inputs into cash.  Improving your CCC also frees up working capital or cash.  Have you heard the phrase “Cash is King?” Well, the CCC is how you ensure your business has enough cash when you need it most!

Understand your current state.

What is the first thing you do when you are about to embark on a new journey?  You look at a map and figure out where you are relative to where you want to be.  You will never be able to measure progress if you do not know your starting point.

Calculate the CCC for your company using the most recent financial data and the formulas provided earlier.  This is your, “You Are Here,” marker.

Can you recall a time in your company’s history when cash was NOT tight?  What was the CCC leading up to and during that period?  How does that compare to your current CCC?  How does your CCC compare to the standards within your industry? Use the answers to these questions to guide the goal-setting process.

Identify and quantify cash levers

As you begin to establish cash conversion goals, you will discover a variety of “levers” that can influence cash flow. Some common levers are listed below.

Sales & Marketing Levers

      • EARLY PAYMENTS: Will any of your customers offer accelerated payment terms? Offer early payment discounts, as necessary.
      • DEMAND PLANNING: Can you engage with your customers planning and purchasing departments to ensure you have access to the most reliable product demand information? Structure your agreements in ways that allow you to level load your operations.
      • DISCOUNTS AND PROMOTIONS: Do you have opportunities to offer discounts or promotions on slow-moving or obsolete inventory? Are there brokers available to provide immediate cash for this inventory?  Can any of this inventory be re-purposed for other sales channels or product lines?
      • SELLING EXCESS CAPACITY: What areas of the business have excess capacity? Use this information to offer discounted pricing as needed to fill this capacity.

Supply Chain Levers

      • EXTENDED PAYMENT TERMS: Request extended payment terms from your key vendors. Remove any early-pay discount programs as applicable.
      • MATERIAL LEAD TIMES: Evaluate long-lead material items, seeking alternate sources with shorter lead times, or assist your vendors in reducing these lead times.
      • OPTIMIZE ORDER SIZES: Review your planning and ordering process to ensure you are ordering in the most economical batch sizes.
      • OPTIMIZE ORDER TRIGGERS: Establish parameters around raw material on-hand quantities to prevent excessive buildup of inventory. Set up replenishment systems, or vendor-managed inventory systems that allow you to reduce your liabilities.

Production Levers

      • PRODUCTION LEAD TIMES: What are your internal production lead times for your highest-cost items? Look for bottlenecks in the process and find ways to eliminate this buildup of inventory.
      • MINIMIZE FINISHED GOODS INVENTORY: Establish parameters around finished goods inventory, highlighting areas where completed product is sitting on your shelf for more than a few days.
      • INCREASE THROUGHPUT: Are there bottlenecks in your production process? Use this to determine where you might need to add more capacity (human or capital resources).  Find equipment that is under-utilized, working with the sales team to bring in work that can fill this capacity.

Financing Levers

      • ASSET MANAGEMENT: What assets are available that can be used as collateral?
      • NEGOTIATE ADVANCE RATES: Negotiate with your bank to find the best inventory and receivable advance rates.
      • MICRO-MANAGE COLLECTION PROCESS: Maintain proper oversight over your AR collection process to limit past due invoices that might become ineligible.

Review this list and decide which levers are most relevant to your business.  Quantify the impact of each lever to determine the potential impact on cash conversion.

Make a plan

Decide on a goal and create a path that moves you toward that goal.  As with any good plan, make sure you have identified key milestones and assigned appropriate ownership to key elements of the plan.  Each element should relate to the identified levers.

Work the levers

This is the fun part! Work through all the levers you previously identified, adjusting your plan as more information is gathered and as progress is made.  Maintain clear and consistent communication within your team ensuring all opportunities are fully explored and executed.  Document and measure your progress along the way.

Repeat

As movement is made, priorities will change and new levers will come into play.  Re-establish your current state, set new goals and repeat the process.

Conclusion

Monitoring your cash flow can often be a daunting and nebulous task.  You can use the Cash Conversion Cycle measurement as a tool to objectively monitor your company’s effectiveness in managing cash.  Using the tools and steps above can help to significantly improve the liquidity of your business and reduce future risk.

If you found this topic interesting, our strategic partner, JACO Advisory Group published content you may find relevant as well: The Underappreciated, but Powerful Financial Metric – The Cash Conversion Cycle

 

This post was written by:
Jeremy Cosby, Director, DWH
jcosby@dwhcorp.com | LinkedIn