“My approach to cash flow is simple. I sign all the checks and make sure that the weekly total isn’t more than $500,000. I challenge the production people every week to ship at least $600,000 in product. I watch the receivables and payables aging statement to make sure that we’re not stretched beyond 40 days on either. And I keep $6 million in my operating account at the bank and check the balance every day on line. What could be easier than that?”

We should all have it so easy.

The speaker was the erstwhile CEO, now happily cashed out, of my most profitable client of recent years. I gave up doing cash flow forecasting for him in the second month of our almost-ten-year client relationship. He kept track of it all in his head. Then he confirmed his assessment by checking the key income statement and balance sheet accounts from the month-end financial statements. The other 99% of the corporate world has to do it the hard way – keeping careful track of A/R and A/P, payroll, invoicing, and cash balances, always being prepared for the worst.

“The worst” doesn’t have to be a double-dip recession. It could be something as obvious (in retrospect) as failing adequately to provide for a seasonal downturn by setting aside enough “rainy day” funds to bridge the gap to the next high season. I am frequently reminded of this when I talk with small company owners, including prospective clients, and discover that they are not maintaining a running cash flow forecast. In recent months, partly as a continuing result of the “Great Recession,” I have heard the following:

• “We’re out of cash; I have payroll coming up, and I don’t know how I’m going to cover it.”

• “Where do I go after I’ve tapped out my friends and family for funds to tide me over?”

• “The bank has covered my occasional overdrafts in the past, but they’re not going to do it in the current environment. And even American Express now wants me to give them direct debit access to my checking account before they’ll authorize additional charges on my account.”

• “Now that I’ve downsized and have a number of employees regularly working from home, my rent expense is a killer. I have more space than I need and two more years to go on my lease.”

• “I need cash, but the banks aren’t lending like they used to. They’re telling me that my business isn’t creditworthy.”

These aren’t theoretical concepts. When you’re out of cash, as the Alligator would say, reality bites!

Of course, there are various reasons for these unfortunate situations, but the surprise element boils down to one key problem – no one was really keeping track of cash. Not one of these managers was figuring out what should have been coming in or what obligations the company was incurring that had to be paid. In a highly seasonal business, which is what most of these were, if you don’t plan for funding your fixed expenses during the slow months, you almost certainly will run out of cash.

In my dialogue with these owners, I have focused on some key elements of the turnaround triage procedure that I’ve developed over the past 25 years:

1. Every dollar in and out has to be anticipated and accounted for on a 13-week cash flow forecast, worked and reworked until there is a positive cash balance at the end of each week.

2. No one gets paid today who is not absolutely critical to keeping the business alive, but be up-front with the other creditors. Let them know that you fully intend to start paying them when the company comes in to its season in a couple of months. Until then, communicate, communicate, communicate! They want to believe. Give them reasons to.

3. Keep the payroll taxes current. It’s tempting to let them go for the three months that the Feds and the State will take to catch up with you, but the penalties are mega-onerous and the (legitimate) intrusiveness of the tax agents will leave you feeling stripped bare.

4. Provide a 10% discount in order to book off-season business, and sell, sell, sell! Then accelerate the output – whatever business comes in gets delivered twice as fast as usual, and the Factor turns the invoices into instant cash.

5. Factoring your accounts receivable can be an interim non-banking solution to a short-term cash flow problem. It’s more expensive than traditional banking sources, but it beats being out of cash (see Alligator Bites below).

6. Finally, if you’re stretched to the max personally and you’re absolutely certain that things will turn around by year-end, suspend your own paycheck and related payroll taxes and have the Company loan you whatever it can afford. But pay it all back out of your taxable income by year-end – “Loans to Officer” (untaxed) is one of the top proscribed items on the IRS audit list.

As indicated at the top of this column, cash is indeed king, but the other part of this mantra is that it’s awfully hard to kill a business that doesn’t want to die, especially one that knows cash flow.

Alligator Bites

“Factoring is the process of purchasing commercial accounts receivable (invoices) from a business at a discount. In other words, the factoring company buys your invoices for less than face value and gets paid in full by your customers. The difference between the discounted rate and the face value is the factor’s profit or incentive for buying your invoice upon submission.

“Spot factoring is not a loan – it is the purchase of financial assets or receivables accounts by a factoring company like IFG, and it differs from traditional bank loans in that bank loans involve two parties, while factoring involves three parties. Banks base their decisions on a company’s creditworthiness, whereas factoring is based on the value of the receivables. With invoice factoring, there are no minimums, no maximums, no long-term commitments, and no lengthy application process.

“Many businesses do not get paid right away for delivered products/services. This negatively impacts cash flow and can make it hard for the business to produce new orders in a timely fashion. Invoice factoring benefits businesses that do not get paid for 30, 60, or 90 days by advancing up to 90 percent of the invoice total, at the time of order fulfillment. IFG looks at the creditworthiness of the client’s customers and can provide funding within as little as 24 hours.”

– from the website of the Interface Financial Group

Factoring is similar to a retail business accepting credit cards. By giving up a percentage of your sales revenue, you can give your customers an alternative to cash payment and still collect the cash quickly. In a B2B situation, factoring all of your sales can be a very expensive way to finance your working capital. Alternatively, spot factoring (with a firm like IFG) provides a tool to manage the fluctuations in your aggregate cash flow. You can turn a few invoices into cash when you need it to cover payroll, a seasonal sales dip, or buy supplies for a new project.

Draining the Swamp

Calculating Days Sales Outstanding (DSO): Total Accounts Receivable at a point in time divided by the average daily sales for the last 60 days [two months of revenue divided by 60].

Calculating Days Payables Outstanding (DPO): Total Accounts Payable at a point in time divided by the average daily expenses for the last 60 days [two months of non-payroll-related expenses divided by 60].

Financial people track DSO and DPO trends over a period of months (or year-to-year) in order to identify trends in a company’s financial environment and/or management.