In business lore, a piece of elder wisdom goes like this, “your survival is driven by a positive cash flow and your success is driven by being your competitor’s worst nightmare.” A recent trend in business accounting has been to show companies how to push out payables and pull in receivables. If you’re the big dog in the market place, this is a powerful tool. However, if you’re a tier two supplier or lower, this is a cash flow train wreck.
John Shegda, President of M&S Grinding, said “a long time customer with a payment pattern of 10 days after invoice was acquired by a larger organization. Almost immediately the payment terms went to 60 days.” The rational for the change is usually, our competitors are doing it so we need to keep up.
In future articles, we’ll address issues and strategies around being a competitive nightmare. For now, our words will focus on the critical components of a positive cash flow.
“Cash flow is the “oxygen” of manufacturing. It drives how fast and how far you can travel or how quickly you can perish. It is the most important asset to manufacturers.” said Ken Krauss, President of US Axle
Most businesses measure their level of success by their monthly and yearly net profit number. That’s what the outside world values, so that gets measured. Actually, it’s an easily manipulated number (think EBITDA instead), always “after the fact” and not reflective of actual performance. A cash flow model generating a daily or weekly cash balance and summary is a much more powerful tool. Just like your personal checkbook balance gives you instant feedback on your home front status, so does cash flow monitoring reflect the true status of your business.
Just in the past year, too many stories have been told of companies with large customer backlogs and no short term revenue. Cash drains so quickly that is almost impossible to recover before the next wave hits. A recent story about a now defunct machining company trying to exist in the nuclear market place describes the dire consequences of this situation. First, there were so many sub-tier suppliers in so many countries that the supply chain was over 20,000 miles long. Second, the finished product was in production for more than 11 months. Finally, the initial down payment was less than 25% at the time of invoice and final payment was not received until 60 days after product delivery. An extreme case for sure but a smaller version of this scenario exists in our business neighborhoods on a daily basis.
Tom Kroll, President of IMET added, “Stay within your means. Emphasis on sales growth skews the organization away from having good monetary controls. Sometimes you have to use pricing or delivery as way to keep a lid on order flow. Don’t let the supply chain gorilla dictate your business.”
While effective supplier partnerships are critical, help yourself by helping your customer manage their other vendors. It not only improves your status but generally benefits your own stream of cash.
Successful debt management starts with stringent cash flow guidelines. Example, lending institutions are on hyper alert for even one missed loan payment, if they don’t know what’s coming.
Susan Smethers, President of Inteprod stated, “It is a misconception to feel that what your bank doesn’t know won’t hurt them. Even with all the changes in the banking landscape, keep re-establishing a strong relationship with your representative. You don’t have time to build a relationship when you need money quickly.”
Lenders measure your success in weekly and monthly increments. Take a moment and walk through your monthly P&L from your lenders perspective. See what they are looking at and set your cash guidelines to reflect their field of vision.
These are just a couple examples of the cash flow culprits and remedy’s. The Manufacturer’s Alliance is scheduling a manufacturing member’s only meeting on May 17th to have an open conversation among its members regarding these cash flow issues and many others. The knowledge shared is another proactive step we are taking together to make our region more competitive. Please join us as we grow in strength through networking.