18-Month Cash Flow Projections: Your Light Through the Tunnel - On the Numbers
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SECTION: On the Numbers

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18-Month Cash Flow Projections: Your Light Through the Tunnel

By Garry Bartecki

Article Date: 09-01-2010
Copyright(C) 2010 Associated Equipment Distributors. All Rights Reserved.

Plus five tips to supplement your survival strategy

I don’t know about you, but the dealers and rental companies I talk to are starting to buy in to the recovery-speak, but they still understand there is a long road to travel before we get there. As a result of this long recovery cycle, the 18-month cash flow projections are of utmost importance to help you decide on your next moves.
The results of cash flow projections will reflect one of three situations:
  • The projections reflect at least a break-even.
  • The projections reflect an increase in cash balances.
  • The projections reflect negative balances.
Obviously, negative cash flow presents a problem, especially if you have hung on this long and really don’t have much more to provide in terms of working capital. I recently worked through this very issue where the company took steps 18 months ago that required lender assistance, which they received, along with pay cuts, expense reduction, etc. But even after the debt restructuring, the 18-month projections will not produce adequate EBITDA to cover debt service after any interest-only periods expire. Now what?
As you look at this mess you think, “We have cut about as much in payroll and expenses as we can. If we cut any more there will not be a business to run.”
Now, you can always go the optimistic projection route, kid yourself and perhaps avoid the inevitable until it is too late to fix – not a good idea. You are in a much better position when you can back off of your tough recovery process as opposed to having to implement a new cost-cutting and restructuring deal in the 11th hour.
So there we were, checking out the balance of 2010 and also reviewing 2011 projected results (18 months), seeing that even with modest revenue increases it is going to be tough sledding in 2011. We plan to continue to update the projections every month to keep the company 18 months out, hoping we can start to see improvement to get cash positive.
I suspect a lot of AED members find themselves in the same position, working through the same scenarios. Some suggestions for further thought are:
  1. If you find that even after lender assistance there may still be a problem I would inform them that additional assistance will again be required in 2011.
  2. Next, I would review (once again) each individual expense category to see what else can be done, keeping in mind the old 80/20 principle. Payroll and benefits are always easy targets but tough to execute. And this works both ways, especially if you have union employees where the raises, etc., come about no matter what. You need to work with the biggest numbers to get any results out of this exercise.
  3. Firm up your credit and collection efforts. Get the billing out correctly the first time and enforce your collection policy without fail. Doing credit checks on current customers is part of this process. You can’t be afraid to do this – customers expect it, and those that don’t pay can put you out of business.
  4. Here comes the tough one: Increase revenues. Believe me, it can be done. First of all, raise prices. The industry has been in the dumps so long that everybody is giving everything away. On the other hand, because of lean inventory levels, increased demand for parts, service, rental units and equipment provide room to implement small price increases for the products and services you sell. Of course, the sales staff will balk at this suggestion, but if you don’t try it you will lose an opportunity to have funds drop straight through to the bottom line, which is what price increases do.
  5. It may also be time to ramp up renewed sales efforts to get what business is out there. There is sure to be a parts, service and rental opportunity. Contractors are operating on a very tight leash these days and when they need something they want it now, and if your company is fresh in their mind you have a good chance to pick up the business. One suggestion is to expand service hours to work on customer equipment on weekends, using a weekend labor rate to cover OT if necessary.
Our industry is recovering, but we can’t take our eye off the ball. Positive cash flow needs to be maintained until the market recovers to some sort of normalcy. Let’s not get overconfident. Keep reviewing your cash flow projections until margins return to normal.

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