A True Story: Bill’s Cash Crunch

My first full-time consulting assignment was for an outdoor power equipment company, we’ll call it “Bill’s Four-Season Power”, in a rural area in western Virginia. It’s the type of place that sells gas powered lawn mowers, trimmers, and lawn tractors in the summer, then snow blowers, chain saws, and wood choppers in the winter. The store was well stocked with recognized brands and they had a lot of long-term customers including a couple of local fire departments. Four full-time repair people on staff in the service department made sure that the customers stayed happy; they could repair just about anything.

Sales were good, and they were well respected by their suppliers. They had incredible credit terms with their key manufacturers. The showroom was clean, brightly lit, and had a coffee machine so people could take their time and relax while talking to the staff about their power equipment needs.

So why was I there?

“Their cash was dangerously low.

They were about to go bankrupt.”

They had just taken out a loan from a company that garnished credit card receipts for repayment.

They were desperate for help, and I was the expert that they had hired to get them out of the quicksand.

“What’s an Outdoor Power Equipment Company?”

So, I’m on the airplane, flying from Chicago to Roanoke, and asking myself, “What’s an outdoor power equipment company?”

I knew nothing about power equipment. I could barely start my lawn mower.

But I had a debrief package and I learned about the background of the company and what they sold. Family owned and run, the father started it, mom helped, the son was the CFO, and the daughter ran the service department as well as doing the marketing. At some time or another I had used almost every piece of equipment that they sold, so at least I had a passing familiarity of what the inventory was, what it was used for, and who their customers were.

What I didn’t read in the package was that this three-week assignment would forever change my view about the critical role that managing cash plays in every company.

“Where’s my money?”

Meeting the family was great. I became close to them over three weeks and they really helped me feel welcome. Our business discussions were laced with personal family issues that I was privileged to and they always asked me to stay, even when things got heated. My “office” was in the break room and I had free run of the front of the showroom, the stockrooms, service center, and outdoor property.

The first time that we spoke, the owner, let’s call him “Bill”, took me on a tour of the entire facility. As he showed me around, Bill told me the whole story:

• The store was doing “OK”, but his spark of enjoying running the business was gone
• He wanted to retire, but couldn’t
• His wife needed to finish her schooling and stop helping in the shop
• The non-family staff couldn’t be trusted to do an honest day’s work
• His financial reports said that he was making a big profit, but he didn’t have any cash

Over and over Bill asked me, with his wonderful Virginia accent, “Where’s all my money!?!?”

Exploring and Asking Questions

As we walked, I did what I always do with a new client, regardless of the industry: I ask a lot of questions.  I dig and dig and dig and dig into what is really happening in the business. Why? Because usually business owners and executives who hire a consultant only recognize the symptoms, they don’t realize that the cause of their problem runs deeper.

In this case, Bill only saw his bank account running at a near zero balance, but he couldn’t see why. He did look at his expenses and suggested multiple times that he needed to fire people, so he could make payroll, but he also knew that the staff was already downsized, and he didn’t know how to get by with even fewer people. He gave me one other big hint about where his money was: As we walked through the store room and around the yard he repeated over and over how old some of his inventory was. Bill was also frustrated he had traded his new products for other people’s used equipment that he couldn’t sell. But the things he should me weren’t the root of Bill’s problem.

“Let me show you where your cash is.”

The day after the tour of the facility and reviewing the business and the numbers, I was ready to sit down with Bill and discuss where his money was. Here are some highlights of what I found:

• Bill had over $1,200,000 in inventory to run a $2,200,000 annual business
• About $500,000 was paid in full
• About $400,000 was on long-term, interest free, financing known as “flooring”
• There was about $60,000 of “stuff” that was taken in trade for new goods instead of cash
• The generator, camper, and other “stuff” was all in good condition and free and clear
• Everything showed up on the balance sheet as assets valued at the full value it was given at the time of the trade in, which meant the book value was much higher than fair market value

Me: “Bill, let me show you where your money is. It in this chain saw, that lawn mower, and all the other paid for inventory. Oh, and you have a bunch of cash tied up on your trade-ins.”

Bill: “So how do I get my cash?”

Me: “Sell it. Now.”

“Here’s some more cash…you just have to ask for it.”

Then I sat down with Bill and Andy, his son, who had an MBA and was CFO. We looked at another part of his balance sheet that was a big number for the size of the business, the Accounts Receivable.

There was about $87,000 in outstanding receivables, and $60,000 was past due.

As we started talking about details and specific accounts Bill got upset, frustrated, and even angry. He made comments like:

“I can’t believe this hasn’t been paid.”

“Why hasn’t he paid? He’s been one of my best customers for years!”

“She should be embarrassed that her bill hasn’t been paid yet. I see her at church every week.”

“Let’s cut them off! I don’t care how big they are! They have bills that are four months past due. We’re throwing good money after bad.”

You get the idea.

Then I asked, “Bill, what do these customers say when you or someone in your organization calls them and asks them to pay?”

Bill turns to Andy and repeats the question, “Well, Andy, what do they say?”

Andy: “Well I don’t really know. We don’t make calls. You weren’t making calls when I came on board last year and you never asked me to start.”

Silence.

Manage Your Cash, or Your Cash Will Manage You

As I continued to work with Bill, we found more pockets of cash tied-up in the business. Here a few examples of the other areas we found cash:

• Used equipment abandoned in the service department whose owners couldn’t be found.
• Service department equipment that was repaired and customers were leaving at the store for winter storage. They would ask for the service and pay for it when they picked it up in the spring, seven or eight months later.
• Unused marketing funds that the key manufacturers offer for placing advertising.
• Excess service capacity – it was winter and the slow season.
• One-off purchases that were not part of the core business that were never sold

As I reviewed these items with Bill and suggested that we get to work fixing them, he asked me, “David, how in the world are we going to fix this? I can’t afford to hire more people.”

My quick response? “Bill, put your current people to work. Add cash management related activities to their every day duties. After all, without cash they aren’t going to get paid. At this point in your business, what are they doing that is more important?”

Bill shook his head in disbelief, and then nodded his head in agreement. He needed to do whatever it took to bring more cash into the business, pay off debts, and make ongoing cash management one of his top priorities. “David, I guess I need to start managing my cash, because for the last couple of years my lack of cash has been managing the way that I run my business. As a result, I’ve made some bad decisions that made the cash situation worse.”

A 3-Week Cash Turn Around

Over the next three weeks Bill, Andy, and I worked from early morning until the evening to get Bill’s Four-Season Power back to a solid cash position. The biggest changes were:

• Selling free-and-clear inventory so 100% of the money received went into the bank. The inventory with financing went back into the stockroom.
• Making friendly reminder calls to people with outstanding balances. We figured out that most of them didn’t realize that they owed any money, so we implemented:
• A “tickler” system to confirm receipt of the invoice with correct information
• Friendly reminders the day the invoice was due
• Follow-up with collection calls as needed.
• Set-up “bargain alley” to sell off-season and refurbished equipment that was unclaimed in the service department.
• Started doing demand-generation advertising paid for by the manufacturers.
• A cash management spreadsheet we used to project income and then determine when payments would be made to creditors. Phone calls were placed to creditors to let them know when payments were coming and how much. This kept credit lines open that were critical to ongoing inventory restocking.

At the end of three weeks there was a real sense of accomplishment. Bill had a clear path of how to move forward and manage his cash. He was making good decisions about where and when to use his cash and when not to.

Every Business Needs to Manage Cash

Cash management is estimating when cash is coming in and making conscious decisions of when it will go out and who will be paid. If the cash doesn’t come in, then management chooses who to pay and pushes out other payments. Cash management tools are updated frequently, as much as daily, and require sound management and financial judgement.

Cash management shouldn’t be confused with historic financial reporting, sales forecasting, or financial forecasting. Historic financial reporting can tell you a lot, but it won’t help you run your business. Using historic financial reports to run your business is like trying to drive your car by only looking at your rearview and side mirrors. Cash management best practices and tools manage the future of your business and help you decide your roadmap forward.

Have you had your own cash crunch?

Most of us have had a cash crunch – either personal or professional. What did you do to get through it?

(Ask 1 question such as: I’d love to hear any ideas you have on the subject. How do you put yourself in control of your cash when it comes in? What you do with it when you have it? How do you decide when it goes back out again?)

Is there a topic you’d like to learn about? Contact me at [email protected] to introduce yourself, share ideas, or ask me questions about managing your business’ cash.

David Safeer help businesses implement cash management systems that create business breakthroughs. He founded The Cash Management Project in November 2018, to help businesses manage and maximize their cash resources.  David writes, teaches, and works with diverse companies around the world.

Thinking globally, one business at a time.