| Over the 30 years or so of managing and advising | | | | commence the same routine again. |
| businesses the most critical basic issue is cash flow. | | | | I've called it the "cork screw effect". They keep turning |
| Managing it requires it to be a war plan, meaning that it | | | | the same process over and over again thinking that |
| must be a ruthless (meaning completely focused) | | | | they're getting something out of it, but in reality they are |
| process of planning beyond the simple budgetary | | | | screwing themselves deeper into a hole of insolvency. |
| forecast. | | | | A recent client in this situation had the resolve to |
| I've seen large companies with accumulated equities | | | | change this process. Within six month they were |
| show profits and they were invariably "comfortable" in | | | | completely out of their problems, even though they had |
| making a profit. However when viewed as just how | | | | been in bank work out, had a negative equity, no |
| much discounting on payables, interest income, the lack | | | | owner had ever made $100k or more in salary, and |
| of normal debt funding of business impacts profit, the | | | | over the past 2 years had a decline in sales of 40% - |
| profit is often a result of the strength of the balance | | | | they were effectively bankrupt. It changed by focusing |
| sheet, not operations. Operating issues and operating | | | | on a rolling 8 week cash planning process. |
| return are missed because the value of cash is not | | | | End one week, add the eighth week. No hope, just |
| considered. | | | | reality to meet the business obligation of profitability. |
| This is typically a second or third generation issue, and | | | | Operations were set to make a profit on each |
| a substantial "mask" to a well managed enterprise. The | | | | customer job. Meetings were held weekly to review |
| banks, accountants, and managers become inured in | | | | the cash forecast, the ongoing jobs, sales leads and |
| the "book profit" and are not motivated to excel in the | | | | estimates awaiting response. Actions were taken |
| operations. Losses are absorbed with less notice in the | | | | each week to address every issue. The same team |
| cushion of cash created by the strong equity balance | | | | that had failed now succeeded. Commitments were |
| sheet. How did it change? The value of cash became | | | | made at a level that they could be met to condition |
| a line item cost, and every planning meeting and cash | | | | banks and vendors "something had changed...the |
| forecast listed a return on the value of equity/cash. | | | | company was in control". Within six months they had a |
| The managers no longer had a "free ride". | | | | new bank, a new line, and vendor credit, and were |
| Companies in trouble become paralyzed with robbing | | | | profitable every month after the initial changes began. |
| from "Peter" to pay "Paul" sending a message to their | | | | Knowing why you make money, what you should |
| vendors, banks, and sometimes customers that they | | | | make, and a ruthless focus in managing cash and |
| are out of control. The focus becomes one of making | | | | profit to that end nearly always creates the results |
| payroll or paying for a delivery of materials to | | | | you want and need. |
| complete a phase of a job to get a check only to | | | | |