Suppose a business purchases the raw materials in January to manufacture a product that will be sold during the following Christmas season. In this case, a significant dollar outflow might occur in the first quarter with little or no dollar inflow expected until the fourth quarter. If the business does not adequately plan around its seasonal sales cycle, the routine expenses that occur during the second and third quarters could create the need to borrow operating capital just to survive until Christmas sales begin. Borrowed capital then creates additional interest expense that ultimately serves to reduce profitability. This cycle might be repeated year after year, exposing the business to a declining profit margin and eventual bankruptcy. To avoid this trap, a business must forecast, budget, analyze and proactively manage its cash flow on an ongoing basis.

Spending Controls. Cash conservation must start with the spending habits of the business. Businesses generally require cash for wages, equipment, raw materials, office furnishings and fixtures, rent, taxes, utilities and more. Many of these costs are fixed and little can be done to reduce them. Discretionary items, on the other hand, may provide a fertile field for conserving cash. Fancy offices and luxury automobiles may say something about management’s style, but do they help the business stay afloat during hard times? How about new equipment? Leasing new equipment may make more sense than purchasing it. Lease payments not only conserve cash on-hand, but they are tax deductible. And, what about outsourcing? It may be more efficient to outsource certain jobs than supporting the overhead associated with a full time employee.

Accounts payable could be the most important area of all for proactively managing cash conservation. Discounts for prompt payment can be rewarding. For example, a 2% discount for paying a bill within ten days may be better than earning double digit interest on the balance due for the next month. It is also important to negotiate better purchase terms. Many suppliers will agree to defer billing or extend no-interest loans to make the sale. Controlled spending is only a part of managing cash flow, accelerating cash receipts is another.

Accelerating Cash Receipts. Accounts receivable represents sales that have not been converted into cash. The longer it takes to collect these amounts, the more detrimental the effect on cash flow. Early payment discounts may expedite the receipt of cash, but at what cost? The simplest way to improve cash flow would be to require cash-on-delivery. This requirement also has a downside. Some companies facing this dilemma have reverted to selling accounts receivable to a third-party on a discounted basis. This is known in financial circles as “factoring.” Again, this is not without cost. The answer to managing this facet of the cash flow equation may best be resolved by the establishment of a corporate credit policy that serves as a guide for extending customer credit. The credit policy essentially sets the terms and conditions based on the individual customer’s credit history. The final piece of the equation for cash flow management lies in inventory control.

Inventory Controls. Inventory describes the extra materials and/or products that are on-hand for future use. Excessive inventories of raw materials or finished products can be detrimental when it comes to managing cash flow. The dollars tied up in this inventory are not capable of earning interest and they are not available for other business use. So, determining the minimum acceptable inventory level and maintaining it, is an absolute must for responsible cash flow management. With the advent of computerized technology and automated warehousing, many progressive businesses have adopted an inventory control system known as “just-in-time inventory.” This system basically coordinates the upstream logistics of moving the required materials or products to the right place at the right time, just as they are needed. Needless to say, cash flow management has a real friend in “just-in-time inventory.”

Cash Conversion Cycle. The business of managing cash flow may be condensed into a fairly simple empirical equation known as the “cash conversion cycle” or CCC for short. Using the metrics of days, the cash conversion cycle equation may be stated as follows:

CCC days = sales outstanding days + sales in inventory days – payables outstanding days

This equation allows a business to actually grade itself, with a real number, on its overall effectiveness at managing cash flow. For example, your business has the equivalent of 45 days of sales in accounts receivable, 20 days in inventory and 30 days in accounts payable, its cash conversion cycle would be a very acceptable 35 days. To phrase it another way, a dollar spent today would theoretically be returned in 35 days.

Managing cash flow is one the key ingredients for success in any business. Proper forecasting, combined with the implementation of spending controls, accelerating cash receipts and monitoring inventory may be the recipe for success. We have a great deal of experience in this area, and can work with you to maximize cash flow. Give us a call today.

Large organizations select and use performance measurement systems to determine whether they are fulfilling their vision, meeting their short-term objectives and achieving their long-term, strategic goals. The measures focus on a critical few that link directly to the company’s strategic plan, and are a combination of financial and non-financial indicators. Some financial performance measurements are historical, whereas non-financial performance indicators allow an organization to review its performance in real time and implement immediate adjustments. In any case, the specific indicators selected should best represent the factors that lead to improved customer, operational and financial performance.

Today, many companies are using a relatively new approach to strategic management developed by Drs. Robert S. Kaplan and David P. Norton of the Balanced Scorecard Collaborative, Inc. The “Balanced Scorecard” system is a management system that enables organizations to clarify their vision and strategy and translate them into action.

With a properly deployed and automated balanced scorecard approach, each management level can monitor the key performance measures within their control and responsibility, and understand the relationship to the overall success of their company. This approach provides management with visibility into the operations and issues of each business unit. It enables management to implement and track key initiatives for the purpose of addressing problem areas earlier or pursuing additional business opportunities faster and more effectively.

A good example of Putting Performance Measurement to Work may be found in Subaru-Isuzu Automotive, Inc., a joint Japanese automotive manufacturing venture between Fuji Heavy Industries and Isuzu Motors Limited.

In 1996, Subaru-Isuzu became conscious of the fact that that they were using only historical data measures to judge the venture’s overall performance. They realized that they had only vague goals and objectives to drive current and future growth. They were unable to effectively forecast targets and objectives for one, three, five and ten year plans. In 1998, the official decision was made to implement the balanced scorecard approach to performance measurement – a system designed in such a manner that the measures selected would actually support organizational goals and objectives.

The next step was to decide what needed to be measured, the frequency of measurement and finally, what type of system was needed to maintain and display the performance trends. After juggling numerous ideas on what needed to be measured, it was concluded that too many measures would likely create an unmanageable data overload. So, a decision was made to use the Malcom Baldrige National Quality Award criteria. This way, “approved” performance measures could be categorized under one of seven business performance objectives. The objectives include leadership, strategic planning, customer and market focus, information and analysis, human resource focus, project management and results. Subaru/Isuzu ultimately reduced the seven down to five major categories that best represented the venture’s key business performance goals.

Now, for the logistical end of the deal – How could Subaru/Isuzu provide a one-stop, easy to use, data management and measurement system for their end users that included security for sensitive data? It was also essential to find a system that would allow the organization to measure performance data against one another, so that the trends in one performance measure might help predict how another performance measure would react to change. To this end, the venture considered all the applications programs currently being used in house (Excel, Paradox and Access). None of these were acceptable to management. Subaru Isuzu selected pbviews to satisfy the perceived system criterion and to ultimately maintain and display the balanced scorecard.

While it is still early in the process, Subaru Isuzu has identified numerous areas for improvement. According to Mr. Brent Lank, Senior Business Performance Specialist, “By far, the best success so far is working toward having all necessary data in one system in one location. We wasted countless hours and dollars ‘browsing’ for reports in our network, calling people for data, etc.”

Subaru Isuzu is now forecasting targets and objectives for one, three, five, and ten year plans based on this system of measurements. Lank went on to say, “This is truly a revolutionary change for our organization”.