Numbers Coach Identifies Opportunities for Improved Cash Flow for Environmental Engineers

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THE COMPANY

In 1996, Scott Pate launched Sierra Piedmont (“SPI”) with a vision to create a superior environmental consulting, site assessment, compliance, and remediation services firm. Since then, SPI has served a wide range of companies from Fortune 100 businesses to regional firms throughout the United States. SPI’s innovative solutions and advice have helped its clients solve their environmental issues.

SITUATION

Pate and SPI’s management team wanted to realize improved cash flow in their day-to-day operations. However, they were not clear on which financial metrics were truly driving the business and needed more meaningful insights beyond the Profit & Loss statement.

SOLUTION: The Numbers Navigator™

SPI hired the Numbers Coach to provide a comprehensive analysis of its financial operations.The Numbers Coach (“NC”) uses its proprietary Numbers Navigator™ tool set to determine the key financial drivers in SPI’s business model. NC gained a further understanding of SPI’s key business issues through a discovery session with management. NC provided Pate and his team with a comprehensive financial report that identified opportunities to drive more cash flow from the business.

RESULTS

Together, NC and SPI determined realistic and actionable strategies to realize improved cash flow quickly. To achieve this goal, NC provided:

  • A 20+ page financial report detailing key drivers in SPI’s business model,
  • A systematic cash flow forecasting model to provide SPI visibility into its future cash flow,
  • “What if” scenarios analyzed to understand the impact of different financial strategies,
  • Establish guiding principles for disciplined cash flow management process
  • A short-term planning tool to ensure resources and cash were allocated appropriately

“Although it sounds cliché, Numbers Coach and the Numbers Navigator™ truly changed our financial life!” explains Pate.  “The fact is, for many years we had little or no ability to perform high level “what-ifs” or projections of cash effects based on pulling different levers in the company.”

“I don’t know of another program quite like this one,” says Pate. “It doesn’t seem boilerplate or ‘canned.’  I think the most benefit is received by using the Navigator in conjunction with Numbers Coaching services to understand how to apply what is revealed by the report to our financial metrics.”

To learn more about Sierra Piedmont, visit www.sierrapiedmont.com

To learn more about the Numbers Coach financial leadership services, click here

As a Business Leader, Do These 3 Worries Seem Familiar?

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Running a business as an owner or part of a leadership team brings along with it worries that can keep you up at night. Here are three of the most common worries, along with strategies for overcoming these fears:

Worried business owner
  1. Employee retention. When you lose a key employee, it is difficult to replace them, especially in a tight labor market. A rule of thumb to replace an employee is upwards of 3x their salary! One way to help retain valued employees is to do a routine check-in with each employee. Some might call it a “stay interview,” meaning what does it take to keep the employee happy enough to stay? In many instances, an employee primarily wants to be heard and valued, which comes from soliciting their feedback on how the company can do better.
  2. Customer retention. It seems with many of my clients fall within the Pareto rule. This means that 80% of their sales comes from 20% of their customers. Hence, if you lose one of these 20% customers, it can be a significant impact on the business. I have used in my business the Net Promoter Score (NPS) which asks a simple question: ”On a scale of 1 to 10, with 10 being highly likely, would you recommend to a colleague to do business with me?” This simple question can help you see if you customers are satisfied with the value you bring.
  3. Running Out of Cash. This fear can vary greatly among business owners and leadership teams based on their risk tolerance. However, if you run out of cash, that’s it. . . lights out and close the door. I have customers who keep a close eye on cash to ensure they have enough to weather economic storms that inevitably come our way. However, I have others who push it to the edge. Each business has a “speed limit” to grow and an amount of working capital that it should have available to meet everyday needs. Calculate your working capital needs by knowing your cash conversion cycle. This is the gap from when one dollar of cash leaves your door until it returns to your bank account from your customer.

Having a strategy for each one of these three worries can be the difference between having a thriving business or closing your doors. Let us know how we can help.

What’s the Deal with Working Capital?

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A Unique Look at Asset Based Lending
by Marc Smith

“Cash is King.”  We’ve all heard the expression, but if you haven’t owned your own business, you likely haven’t given it serious thought.

When a business is for sale, most people first want to know about the total revenue (sales) and the net income (profit).  These two factors are extremely important, but any business owner would argue that there is another factor that is even more important than these two:  Operating Cash Flow or Working Capital.  Profits are great, but no matter how much money is coming in the future, a business can’t continue to operate if it doesn’t have enough cash to cover this week’s payroll.

Let’s use an example of a recent business acquisition: 

XYZ Company is acquired by an eager buyer who uses an SBA Loan to finance the transaction.  Everything starts out great for the new owner:  their new business is growing, sales are up and they are enjoying the rewards of self-employment.  XYZ Company has many new orders to fulfill or new contracts to service as a result of this growth.  The working capital associated with this expansion are typically paid up front while the company won’t receive the benefits until the customer remits payment (sometimes months down the road).  As the new opportunities develop, the up-front costs associated with these opportunities keep increasing.  Before long the owner is looking at a significant cash gap from what is owed to suppliers now versus the cash that customers will not remit for another 30-45 days or more.

The owner realizes that with the recent growth, there is a need for a line of credit.  Obtaining additional funds or refinancing with the SBA Lender typically isn’t an option, so they inquire with their local bank for conventional financing.  This presents a problem:  all business assets are already collateralized with the SBA Loan, leaving the bank with no collateral.  Therefore, the bank is not willing to extend the company a line of credit.  This leaves the owner in quite a predicament:  sales are up and the future looks bright; however, the short term cash flow constraints are keeping the company from taking advantage of that growth.

Profits are great, but no matter how much money is coming in the future, a business can’t continue to operate if it doesn’t have enough cash to cover this week’s payroll.

– Marc Smith

It is this type of situation that can potentially be resolved with an Asset Based Loan.  Typically secured by Accounts Receivable, an Asset Based Loan provides working capital to a business.  It does not add cash to the business, it simply accelerates cash flow by allowing a business to borrow against the future value of its receivables that are expected to become cash in the near term.

The SBA Lender is many times willing to “release” the Accounts Receivable to the Asset Based Lender because this provides the company with additional liquidity.  By working with the Asset Based Lender, the company now has the capital it needs for growth without worrying about how it will meet its short term cash demands.

Marc Smith is a Vice President with Magnolia Financial, Inc., an Asset Based Lender that provides Accounts Receivable Financing and Management to growing companies that are typically unable to obtain traditional bank loans.  He can be reached at msmith@magfinancial.com or (404) 664-7037.

Cash Flow Forecasting Keeps You in the Black

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by Anne Moore Odell

Like blood beating through the heart, cash flows in and out of a business. Cash flow is not profit. Rather it is the money coming into the business through sales and other revenues and it is the cash leaving the business, for example, as paid invoices and payroll. Cash flow, or cash on hand, is simply cash in minus cash out.

Cash flow forecasting, then, is the process of looking forward to what you expect your cash flow to look like over a set period of time. The period can be for a month, 12 weeks, or even as long as a year. It is an extremely useful tool for businesses as it can provide insights to improve profitability.  If management has a well-constructed cash flow forecast for the year ahead, it is in a strong position to plan, execute and control improvement measures.

“Forecasting cash flow helps businesses be realistic rather than idealistic”,  says Jack Koester, a  Counselor affiliated with SCORE(r) Lake/Sumter Chapter 414 in Florida. “Cash flow forecasts are tedious and require substantial due diligence. But survival is the main early benefit.  It always has been, but it is much clearer today.” SCORE(r) provides free online and face-to-face business counseling, mentoring, and training.

Creating a Forecast

A cash flow forecast is a written document that makes note of all the cash that you expect to receive and all the cash that you expect to pay out over a given period.  Plan for when you will receive payment on invoices so that you can efficiently time your payments to vendors.  To be useful the forecast needs to be updated frequently, honestly, and in the current economic times, conservatively.

There are many programs available to help with cash flow forecasting, but one of the best is one that your business probably already uses daily: Excel. “An Excel spreadsheet allows you to create a forecast that matches the size of your organization, the inflows and outflows,” says Mike Iverson, CEO of Trillium Financial.  These types of models can be effective ways to measure near term cash flows such as a rolling thirteen week plan.

For businesses interested in a cash flow software program, one provider is PlanWare.  Says Brian Flanagan, Director, PlanWare.org, “The simplest solution is to develop a cash flow forecasting plan using a spreadsheet. This can be a do it yourself worksheet or based on a template located on the internet.

Another option is a full software program that you can purchase such as PlanWare’s Cashflow Plan.  It offers a range of forecasting planners some of which are  integrated into your budget planning which includes a balance sheet, profit and loss statement, and a cash flow statement.  The benefit of the full software program is a change in sales automatically adjusts the cash inflows from receivables and values for cash and receivables in the balance sheet based on your assumptions.  These plans can be effective for longer range planning such as over a 12 month or longer period.

Cash Flow Forecasting in a Recession

“Many more companies are generating cash flow forecasts today. Cash is always an issue, even in good times,“ says Iverson. “I have more clients that forecast 12 weeks out, especially now. Cash flow forecasting for the next 12 months can be more difficult.”

Iverson adds, “With ever larger, more seemingly secure companies declaring bankruptcy, asking for extended terms, and making slow payments, cash flow  is definitely trickier than it has been in years past. Making it even more important to do.”

“If we feel clients are being too optimistic, we strongly suggest they project a separate set of cash flow projections based on a WORST CASE scenario. Sobering!” says Koestar.

“More of your Fortune 500 or Fortune 2000 companies are using cash flow forecasting. Typically, they don’t have a huge need to forecast cash short term,” Iverson adds. “But companies are making sure that they are going to have cash and capital, regardless of their size, forecasting more frequently and in shorter time frames.“

“In buoyant times, businesses were reasonably sure that cash would automatically follow on from profitable trading,” says Flanagan of Planware. “This allowed firms to gear up and pursue higher sales without worrying unduly about getting paid or securing additional credit for working capital purposes.“

Flanagan continues, “The downturn has changed all this and the key issue has become the maintenance of cash flow. This is, in many senses, more important than profitability as more businesses fail because they run out of cash rather than generate losses. Cash flow forecasting has become critical in two areas. First, short-term planning for receivables, payables and inventory to ensure that working capital (cash) is managed effectively. Secondly, medium-term forecasting, e.g. for 12 months ahead, so that firms can anticipate cash flow problems.”

Forecasting cash flow is always difficult. The recession has exacerbated this because it has disrupted established trends and patterns.   However, when forecasting during a recession, Flanagan has two suggestions: First, concentrate on higher-level forecasts as these can be just as accurate or possibly more accurate than very detailed projections. Second, make forecasts based on alternative scenarios, for example, “most likely case” and “most probable worst case”.  Aim to hit the former but take actions that presume the latter will occur.

How Weak Cash Flow Affects Your Business

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by Michael Iverson

In a recent article, I discussed a company that had greatly improved its cash position in a year’s time. To complete the discussion, it’s important to consider reasons why a company’s cash position might deteriorate from one year end to the next

Take a look at the following Statement of Cash Flow:

Statement of Cash Flow for ABC Company for the year ended December 31, 2013

Cash Flow from Operating Activities   

Cash receipts from customers                     568,000

Cash paid to suppliers and employees       (622,200)

Cash generated from operations                  (54,200)

Interest received                                                    500

Interest paid                                                       (1,200)

Taxes paid                                                         (2,900)

Net Cash Flow from Operating Activities         (57,800)

Cash Flow from Investing Activities

Equipment additions                                           (10,500)

Replaced equipment                                           (24,200)

Proceeds from sale of equipment                           1,900

>Net Cash Flow from Investing Activities             (32,800)

Cash Flow from Financing Activities

Proceeds from capital contributions                   12,100

Repayment of loan                                             (19,300)

Net Cash Flow from Financing Activities             ( 7,200)

Net Increase/Decrease in Cash                 (97,800)

Cash at January 1, 2012                               122,600               

Cash at December 31, 2012                           24,800

In the statement above, the Cash Flow from Operating Activities is a negative number. As you can see, cash receipts from product sales are exceeded by the cash paid to company employees and suppliers. That’s not a good sign.

The objective of any business is to generate cash sufficient to cover all expenses and pay owners/investors a reasonable return. In this instance, the product sales for the business didn’t quite meet the costs associated with manufacturing and selling the product. Unfortunately, there were no returns on investment for the owners and investors.

Rapid Depletion of Cash

Looking at the cash balances at the beginning and ending of the year ($122,600 to start the year vs. $24,800 at year’s end), the healthy cash balance at the start of the year was seriously depleted by year’s end. The situation is serious enough to threaten the viability of the business.

The problem is the company’s negative Cash Flow from Operating Activities. By reviewing the year’s budget, we could determine the extent to which actual Sales for the year fell short of budgeted Sales. If actual Sales fell short of budgeted Sales, we would further examine the reason(s) why.

The other possibility is that the Sales was fine, but collections for products sold fell far short of expectations. In other words, product sold and delivered was not paid within the payment terms provided to customers.

Cash Flow from Investing Activities shows that equipment purchases totaled $34,700, increasing the negative cash flow. Since equipment purchases could include both replacement equipment and new additions for product expansion, these investments can put a further strain on the business.

Capital Contributions Required

The owners contributed $12,100 in capital during the year, however, loan repayments used $19,300 of cash. Are there more loan repayments due in 2014 and beyond? If so, then the owners will likely be required to contribute in 2014, assuming the cash flow from operating activities continues to be negative.

Borrowing money from a bank will be difficult given the company’s poor cash flow.

Keep a close eye on your Cash Flow from Operating Activities and understand the drivers of this number. This knowledge can be the difference between staying in business and going out of business.

If you would like to discuss how your business is positioned, contact us.  We’re glad to help you create and interpret your Cash Flow Statement.

Know the Real Flow of Money Through Your Business During a Year

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by Collette Parker

Did you know that almost half of businesses have their best-ever year right before they file for bankruptcy? They grow right out of business, and usually it’s not because of lack of sales – it’s poor management of cash.

“They may have had their best year on paper, but when you look at cash flow and working capital it’s going south real fast,” says Mike Iverson, CPA, and CEO of Trillium Financial.

The old adage is true: you can’t manage what you don’t measure. And even if sales are good, if you have vendors and employees asking for money – but customers who don’t have to pay for another 45 days – it’s a perfect storm for a cash crisis.

“Take the time to do a financial business plan every year,” Iverson says. Not 30 pages, but a simple two-pager with a financial forecast and a budget for 12 months. “That will give small businesses a leg up from those businesses who don’t write this out.”

Visuals help. It’s not enough to just go through a plan in your head. The process of examining your business closely enough to work out a model and a 12-month plan helps you to understand the flow of your business, including issues of seasonality. If you plan cash flow properly you can figure out how much money you can have in hand when you go into manufacturing season, and how much you’ll make in selling season.

“You can’t just set a $12 million goal, and divide the revenue figures by 12 for the year,” says Iverson.

12-Month Trailing Budget

One financial management tool that is useful in managing cash is a 12-month trailing budget versus actual. Once January closes, look at the last 12 months (including January) and chart the revenue. Then look at December and the 12 months prior. Are the numbers higher or lower? Look at the graph. Is it flattening out? Going down?

“Graphing a trailing 12-month is a simple visual tool,” says Iverson, “and can be used for both sales and expenses. If your management team sees a graph instead of a bunch of numbers, they can understand the concept. Hopefully you’re spotting a positive trend. Either way, you can understand what your cash trends are, and then have a budget that is detailed enough to plan.”

Three Key Elements of Budgeting

When planning the budget for healthy cash flow, be mindful of how much is invested in your working capital, and keep track of three key areas:

  1. Accounts Receivables – Unless you are a cash business, chances are you extend credit to your customers. If your terms are 30 days, your customers should pay you within 30 days, not longer. If you begin to see a trend where customers are waiting 45–60 days to pay, you will probably begin to see cash flow problems. Don’t be a free bank for your customers. Look at ways to reduce the time it takes customers to pay you: ask for advances from customers, or a down payment, installment, or some level of prepaid portion of the sale. If you’re in the situation where you really need the cash now, you can work with a factoring firm for receivables, or the bank for a loan.
  2. Accounts Payable – Have favorable credit terms and solid partnerships with your vendors. In this area, you want to hold on to your money as long as you can. But, if vendors offer early payment discounts and you can afford to take it, go ahead. Sometimes, even if you have to borrow the money to pay early, it might make sense to do so. If you can borrow money at eight percent and take a two percent discount for 10 days early (2% 10 net 30), you are effectively earning 36 percent over a year. (If you do that, make sure the borrowing doesn’t put you at risk for running out of cash and not being able to pay your other bills.)
  3. Inventory – Manage your inventory so that it doesn’t sit in a warehouse for too long. Once you’ve paid for the inventory, it should be sold and generate profit for you. Adjust your inventory for the seasonality of your industry so you’re never caught with too much.

An example of good management of these three factors would be to extend 30-day terms to customers, purchase inventory and turn it around in 15 days; and pay vendors in 30 days.

If you would like to discuss more creative ways to manage cash flow, contact us.  We’re glad to share our ideas!