By John Barrickman

"Only cash pays loans," cautions the banker.

"Free cash flow discounted at the appropriate rate is the only meaningful measure of value," exults the investment banker.

"I have a cash flow problem," laments the small business person.

It seems everyone is focused on cash flow these days. Even the accountants recognized the importance of cash flow when they recast the Statement of Changes in Financial Position to become the Statement of Cash Flows. By carefully examining the following three questions, you can take a big step toward improving cash flow management at your company.

#1 Where is your cash trapped?
A critical part of managing any business is optimizing cash flow. The starting point must be determining where cash is currently tied up. Review your balance sheet:

• Do you have non-productive cash sitting in multiple non-interest bearing accounts?

• Look at your total uncollected sales/accounts receivable. This represents a large lake in which huge amounts of cash can be trapped.

• What about unrecognized costs/inventory? This is another pool of trapped cash.

• Now look at fixed assets. Do you really need that fancy building, all that equipment, those company cars, the airplane?

• What about the loans to officers, employees and affiliated companies? Do you really want to be a bank?

#2 Where does cash come from and where does it go?
Now that you know where your cash is trapped, look and see where cash comes from and where it is going. The best tool to help you do this is the cash flow statement in your financial statement. If you do not have one, ask your CPA, bookkeeper or banker to help you prepare one.

The cash flow statement unwinds the timing differences between profits and cash introduced by accrual accounting. It classifies cash flows as operating, investing or financing flows. Operating flows arise from the ongoing operations of the business (e.g., sales for cash, collection of receivables, purchase of inventory or payment of accounts payable). Investing flows are discretionary, such as the purchase or sale of fixed assets. Financing flows arise from borrowing and repayment of debt, as well as infusions of capital and payment of dividends. The cash flow statement helps you answer two basic questions: What is causing more cash to go out than come in? And what can change to allow more cash to come in than go out?

Look at cash flow over the last three or four years. Where did cash come from — earnings, liquidation of assets, borrowings and/or capital infusions? Where did cash go: to fund growth, or to fund inefficiencies (i.e., longer receivables collection times or slower inventory turns)? To purchase fixed assets, or to support your lifestyle? To the extent you relied on borrowings to fund shortfalls in internally generated cash flow, are they put to productive uses, such as to purchase assets that would generate cash to repay the debt? If not, the borrowings become a drag on the overall performance of the company.

#3 Can you improve your existing cash position and ongoing cash flow?
The next step is to look for ways to improve your cash flow. Start with your current processes for managing cash. Can you expedite the processing of receipts and accelerate the collection of funds through such tools as a lockbox, concentration accounts, depository transfer checks, ACH or other electronic payments? Are there ways to hold on to your cash longer or to revamp accounts payable procedures and controlled disbursement accounts? Banks offer a broad range of treasury management services to help businesses increase their available cash and ensure that excess cash is invested until needed or used to reduce debt to enhance overall profitability.

Are there ways to reduce your investment in accounts receivable? Do extended terms generate incremental sales or wider margins? If not, they reduce profitability by tying up non-productive cash. Compare your average accounts receivable collection time (AR/sales x 365) to your terms of sale and industry averages. (Robert Morris Associates Statement Studies are available from your banker.) Calculate the amount of cash you have invested in excess receivables. More importantly, calculate the cost of carrying these excess receivables by multiplying your borrower rate by the excess receivables (see accompanying worksheet).

Can you justify this cost? Maybe it results from lack of focus on collecting receivables. Does it make sense to hire someone, even part-time, to call customers and encourage prompt payment? For the money involved, can you justify spending 30 minutes a day calling slow-paying customers? Note that $26,250 in annual savings works out to be compensation of $201.92 an hour for your time. Likewise, look for ways to reduce inventory. Compare your inventory levels with desirable levels and industry average inventory turnover (Inventory/Cost of Goods Sold x 365). Calculate the excess inventory investment. (Use the same methodology discussed above for accounts receivable but substitute cost of goods sold for sales in the calculation.) Calculate the cost of carrying that excess inventory (e.g., interest, storage and insurance).

Can you shift a portion of the burden to your suppliers by using "just in time" inventory management procedures? Can you cost-justify a more sophisticated inventory management system? Of course, you may have accumulated excess inventory over the years which could be liquidated in the normal course of business or in a bulk sale. There are numerous examples of companies that have been able to dramatically reduce inventory levels without adversely affecting operating efficiency, sales, margins or customer satisfaction.

Look at your investment in fixed assets. Identify excess assets — especially buildings, surplus equipment and non-productive assets — and look for ways to convert them to cash. See if additional investment in technology or more productive assets might improve overall profitability. Pay particular attention to "other" assets, such as loans to insiders or affiliates. Can the company afford to carry these loans?

Can you be a survivor?
At no time is cash more important than when times are tough. During good times, businesses tend to get sloppy in their cash management practices, particularly when interest rates are low and credit is plentiful. Now is the time to improve cash flow by improving profitability, operating efficiency and cash management practices.

Companies that take steps now to improve cash flow will be in a better position to weather the next downturn. More importantly, these companies can capitalize on opportunities that become available, especially from companies who were not as prudent and proactive.

Be a survivor — focus on managing cash.

John Barrickman is president of New Horizons Financial Group in Roswell, Georgia, a consulting group specializing in risk management, small business lending and credit processing. He is also the former president of an Atlanta financial institution.

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