Control Cash Flow for Continued Survival - On the Numbers
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SECTION: On the Numbers

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Control Cash Flow for Continued Survival

By Garry Bartecki

Article Date: 06-01-2010
Copyright(C) 2010 Associated Equipment Distributors. All Rights Reserved.

Six action steps to guard what’s yours and position for growth when the opportunity arises

In this economy, one day the recovery is moving ahead and the next day we are back in the dumps. All you know for sure is that it is really tough to manage in this situation, not knowing what steps to take next.
We all agree the economy still stinks and all your managers have headaches, but we still have a business to run and manage. And manage we will, because if you are reading this column you probably have survived to this point and need to get ready for the next 12 to 18 months.
Your first priority must be a reliable cash flow model you can use and modify as conditions change. What I have been doing lately is preparing a detailed budget by department (did it for 2010) and then substitute actual results as they become available. Do this and you immediately know if you are ahead or behind, by how much, and what your latest results did to your cash flow projections. You can also keep extending the cash flow model and add a month as you close out a month so that you always have a 12-month projection in front of you.
Of course, you know that calculating cash flow from operations is only the first step in determining actual cash flow changes, and that you have to also account for balance sheet changes as well. A good example is your note payments. They show up every month and have to be accounted for. To help with this issue I have the accounting department give me a day-to-day running summary of actual cash activity. On the left side is the deposit activity and on the right side the disbursement activity and the updated book cash balance. The categories I use on the right side will be the major categories of expenses you want to see. I always include payroll, note payments, AP payments, plus whatever else you find you need, and pretty soon this report becomes useful as you get familiar with the totals. Eventually you are able to immediately recognize when something is not looking right.
In all this, keep in might that the EBITDA (book earnings before interest, taxes, depreciation and amortization) number is your banker’s favorite number because it tells him if he is going to get paid this month or not. If you are not generating enough EBITDA to cover your debt service you have a problem, which is not unusual at this point in time.
Once your cash flow model is under control and you can actually show your banker a plan he/she will understand, what do you do next? It may be time to “zero base” the business in general. Tear the whole thing apart and put it back together to deal with the “updated” markets you will have to deal with. The point is, we are not going back to the way it was, and thus your old business structure will not provide the kind of returns you are looking for. Consider some of these activities:
1. Go back over all your vendor relationships – cull out the ones that are unprofitable and review the agreements for all the others. You will be amazed at what you will find in there. Bet there are personal guarantees you didn’t even know about, and it might be a good time to discuss those.
2. Review your bank agreements, interest rates, terms and guarantees. Banks are starting to come around and if you are in the right situation you may be able to make some changes. Heck, even your credit card may include a personal guarantee. Time to find a new card.
3. Make sure every full-time employee actually has a full-time job. Make sure training is up to date, or at least put together a training budget so that you don’t miss profit opportunities when things turn around. Also consider upgrading if you can.
4. Health care costs – these are going to be nuts for the next few years. I am working with a group that has created a modern captive structure for AED dealers that will keep these costs in line while avoiding all the past horror stories about captives. Let me know if you want to know more about it.
5. Review your tax situation, because there are plenty of opportunities out there to generate cash for the business. Make sure you know what they are.
6. While you are at it, review your personal financial planning and tax situation, and if you need some help from a person who knows the dealer business let me know. There are ways to mitigate personal guarantees and improve your tax situation. If you have not performed this review in the last five years, do it now.

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