Basic Accounting

Over the 30 years or so of managing and advising businesses the most critical basic issue is cash flow. Managing it requires it to be a war plan, meaning that it must be a ruthless (meaning completely focused) process of planning beyond the simple budgetary forecast.

Ive seen large companies with accumulated equities show profits and they were invariably comfortable in making a profit. However when viewed as just how much discounting on payables, interest income, the lack of normal debt funding of business impacts profit, the profit is often a result of the strength of the balance sheet, not operations. Operating issues and operating return are missed because the value of cash is not considered.

This is typically a second or third generation issue, and a substantial mask to a well managed enterprise. The banks, accountants, and managers become inured in the book profit and are not motivated to excel in the operations. Losses are absorbed with less notice in the cushion of cash created by the strong equity balance sheet. How did it change? The value of cash became a line item cost, and every planning meeting and cash forecast listed a return on the value of equity/cash. The managers no longer had a free ride.

Companies in trouble become paralyzed with robbing from Peter to pay Paul sending a message to their vendors, banks, and sometimes customers that they are out of control. The focus becomes one of making payroll or paying for a delivery of materials to complete a phase of a job to get a check only to commence the same routine again.

Ive called it the cork screw effect. They keep turning the same process over and over again thinking that theyre getting something out of it, but in reality they are screwing themselves deeper into a hole of insolvency. A recent client in this situation had the resolve to change this process. Within six month they were completely out of their problems, even though they had been in bank work out, had a negative equity, no owner had ever made $100k or more in salary, and over the past 2 years had a decline in sales of 40% - they were effectively bankrupt. It changed by focusing on a rolling 8 week cash planning process.

End one week, add the eighth week. No hope, just reality to meet the business obligation of profitability. Operations were set to make a profit on each customer job. Meetings were held weekly to review the cash forecast, the ongoing jobs, sales leads and estimates awaiting response. Actions were taken each week to address every issue. The same team that had failed now succeeded. Commitments were made at a level that they could be met to condition banks and vendors something had changedthe company was in control. Within six months they had a new bank, a new line, and vendor credit, and were profitable every month after the initial changes began.

Knowing why you make money, what you should make, and a ruthless focus in managing cash and profit to that end nearly always creates the results you want and need.

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