CETA Edge: The Value of Monitoring Cash Flow

By Diane M. Calabrese / Published August 2014

 

Ready money is a good synonym for cash according to Webster’s New World College Dictionary. We agree.

 

“Cash flow is crucial to an entity’s survival,” says Greg Blanchard, MBA, the General Manager at Pro Chem Cleaning Systems of Dallas-Fort Worth in Arlington, TX. And it is an indicator of “solvency.”

More than that, however, cash flow across various intervals can present “a record” that can be used to assess the past and predict the best course for a business, says Blanchard. It’s vital information.

In addition to the important forecasting element that understanding of cash flow provides, there are the basic needs met, explains Blanchard. “Having ample cash on hand will ensure that creditors, employees, and others can be paid on time.”

At Blanchard’s company, the office manager and a CPA collaborate on “monitoring, reporting, and managing cash flow,” he says. (His company uses QuickBooks.) Assessment of the ups, downs, and reasons for fluctuations is then used by ownership/management in implementing changes.

As a practical matter, getting accounts receivables under control can give a boost to cash flow, says Mylan Williams, General Manager/Sales at Hy-Flo Equipment in Pittsburg, KS. “We are using QuickBooks Enterprise for our accounting software, and the reports available are very valuable and user-friendly.”

Williams says the value of monitoring cash flow cannot be overstated. “It’s amazing the results you can achieve by having someone managing your accounts receivables daily.”

There is plenty of assistance available to manufacturers and distributors as they aim to fully understand cash flow and improve their financial health. For one, across the last several years, Lease Consultants has held a class at the annual Cleaning Equipment Trade Association gathering, PowerClean. Although it is a leasing company, it also offers services to help cash flow, explains Chad Rasmussen, the head of the CETA finance committee and general manager at Royce Industries, L.C. in West Jordan, UT.

“There are several things I remember from their classes,” says Rasmussen of the leasing company sessions. All are geared toward an effort to “shorten the ‘cash cycle’ as much as possible.”

Rasmussen enumerates the essentials of what he took away from the classes. “One, get payment for equipment as quickly as possible—at time of order or delivery—and avoid giving terms on big ticket items. Two, give courtesy calls reminding people of open receivables before they are due rather than waiting to call until they are past due. Three, take early payment discounts when available. Four, if a vendor gives 30 day terms and does not offer an early payment discount, do not pay them at 15 days.”

In other words, get paid as quickly as possible and hold onto cash as long as possible. Strike a balance.

“This year, the Education Committee of CETA is planning on having a class about understanding the drivers of profitability,” says Rasmussen. “I will be helping with this class, and we hope to go over how to read a financial statement, metrics to determine profitability and cash flow, and things companies can do to improve cash flow and profitability.”

Layers of Movement

When cash moves in or out of a business, that is cash flow, explains Roy G. Chappell, CEO, Chappell Supply and Equipment Co. in Oklahoma City, OK. Typically measured during a specified or limited period of time, cash flow has subcategories of meaning.

Chappell explains that operational cash flow, which must be positive if a company is to remain solvent, is “cash received or expended as a result of the company’s internal business activities. It includes cash earnings plus changes to working capital.”

In contrast, cash received from the sale of long-life assets or spent on capital expenditures is investment cash flow, explains Chappell. And cash received from the issue of debt and equity or paid out as dividends, repurchases, or debt payments is financing cash flow.

“What is your operational cash flow in 30 days if you have $500,000 in accounts receivable?” asks Chappell. “The CETA Benchmarking 2011 shows the average collection period is 43 days. So you divide $500,000 by 43 days, which equals approximately $11,600 cash flow per day per month—or $348,000 of the $500,000 should come in during the month.”

Understand the operational cash flow and go from there to bolster the bottom line. “By having a profit before taxes of five percent or higher, you should be able to meet your accounts payable within 15 days of the due date,” says Chappell. “If your profit before taxes is eight percent or higher, you should be paying your accounts payable and taking discounts. This will help add to your bottom line even more.”

Planning for Profit, or benchmarking, is a program that has benefitted CETA members for six years. “A benchmarking or CETA Performance Analysis can do wonders for you at the bank,” says Chappell. “We started benchmarking in 2008, the first year CETA offered it and have done so each year thereafter.”

A strong performance analysis report that compares a business in the context of others in the same industry constitutes solid data that a banker appreciates having, says Chappell. It can be of great use in gaining or extending a line of credit.

“Monitoring cash flow to a business can be referenced as the fuel gauge of an automobile,” says Gregg Brodsky, Regional Manager at Alkota Cleaning Systems, Inc. in Alcester, SD. One of the best aspects of using a tool such as planning for profit is that it standardizes (and demands) accurate reporting.

Brodsky likens cash flow monitoring to watching the fuel gauge on an automobile. Over a long haul, checking and rechecking become critical, indicating to the driver the distance that can be reached, as well as whether fuel is being consumed too rapidly and adjustments might be needed to the vehicle.

“If inventory, as an example, is not monitored daily, you will have a fictitious or educated guess as to the correct number to use in your financial report,” explains Brodsky. “If you cannot or do not run a financial report at least weekly, you need to fix that…before you run out of cash.”

Just as a vehicle comes to an abrupt stop—in the most inconvenient spots—when the fuel is gone, so a business that loses control over its cash flow can be brought to a halt. (There is a reason for the liquidity metaphor that is so often tied to cash flow.)

Understanding cash flow enables a business to avert “a catastrophe,” says Brodsky. And catastrophe may be “failure.”

Brodsky is a strong advocate for the CETA Planning for Profit, or benchmarking, program. “Being profitable does not necessarily mean being liquid,” he explains. “A company can fail because of a shortage of cash even when profitable.” The reason is usually because the company does not have sufficient operational cash—something it learns only too late and something that could have been avoided had it been tracking and measuring every segment of revenue and expense categories.

Absent cash flow, financial health is threatened. Just as ready money is needed for a trip to a familiar place or a new destination, so is ready money needed for a business aiming to stay on a strong path or alter course.