Street-smart ways to generate cash

Time is moneyAn essential ingredient in any turnaround case is to improve financial predictability. One effective way to achieve this is to generate rolling short-term cash flow forecasts. The process of forecasting the short-term cash position, communicating the information to stakeholders and, of course, hitting those forecast targets is essential to rebuilding confidence among all stakeholders: investors, lenders, creditors, employees. It’s also critical to implement cash-generating strategies. For quick wins: Reduce working capital by liquidating surplus or outdated stock, improve collections and stretch payments to creditors. Put capital expenditures on hold unless they are mission-critical.

Yes, you can play hardball

When turnaround pro Gary Sutton was called in to turn around Knight Protective Services, an early move was to contact creditors in person to explain the situation, the turnaround plan, and his hopes for positive cash flow soon.  At the same time, he offered to pay of the debtors early, if they would settle for 25 cents on the dollar. Sutton’s advice: “Send a check for this amount, with a letter encouraging him not to cash it, explaining again that you fully expect the business to recover and to pay the balance in full.  Mark the check ‘void if endorsement altered’ and on the back side, write ‘negotiated as payment in full for outstanding debt.’  After the first creditor cashed the check, we called all the others with the same offer, explaining that we were making the same offer to eliminate any claim of favoritism. We urged them all not to cash their checks; most took the deal.  It’s hard not to cash a check.”

Payables Financing

You can get a quick win in cash management by stretching payments to creditors, sometimes euphemistically called “payables financing.”  There’s no magic to it; you simply stop paying bills for and see how long it takes for creditors to contact you and complain.  Pay promptly when they call, and then schedule future payments just prior to that “pain point.” Another, less Draconian technique is called payment timing optimization (PTO) and recognizes that routinely paying bills according to some arbitrary schedule costs precious cash flow. Too many firms simply pay bills in batches, paying little attention to actual due dates. In fact, the accounting system may call the shots, forcing bills to be paid in batches. You can turn this to your advantage. Since credit departments typically process receivables the same way, in 30-60-90 day “buckets,” paying on day 57 is the same as paying on day 32.  Remember that printed invoice terms don’t necessarily match the real-world terms you can negotiate — or impose.

Cash rationing

Turnaround whiz Mike Parton introduced tough controls over cash and costs in dealing with a crisis at Marconi, the well-known U.K. electronics industry leader.  Mike, who describes his leadership style as “trench warfare,” implemented over 100 initiatives aimed at ensuring a steady flow of cash.  Cash was pooled in “lockboxes” with access requiring both lenders consent and Mike’s approval as CEO. Cash was “rationed” with minimal funding available from headquarters. That forced local managers to be more creative in managing their own cash flows.  Actual and projected cash flows were monitored weekly, at top-level reviews chained by the CEO.  This was an important and symbolic demonstration of his strong leadership, and set the tone from the top down. At the same time, expenditures were examined and cost reduction targets established worldwide.  Intense monitoring drove costs down from £890 million to below £400 million in just under two years. Weekly progress reviews were relentlessly focused on details, to ensure that every initiative progressed according to plan.

Most companies don’t realize how much cash they can generate from the right side of the ledger.  Los Angeles financier Bruce Barren, who’s handled some 200 turnaround cases, recommends taking these three steps:

1. Develop an “early warning system,” so that you don’t miss signals that tell you when to circle the wagons. Whether your red flag is average payables of 100 days, receivables slowing to a crawl, or loss of credit with a key vendor, take corrective action promptly.

2. Update the accounts payable list. Armed with a current A/P list, you’ll get a full picture of who the company owes, and how much. You can then ask, “Who can we restructure? Who can we placate? Who can we continue to get terms from?”

3. Prioritize vendors and clear off the little ones. Use the first available cash to rid yourself of the nickel-and-dime vendors you owe $500 to $1,000. That lets you focus your effort on larger vendors, and minimizes the risk of a blindside involuntary bankruptcy filing (it takes only three vendors to file one).

Of course, you want to preserve relationships with big-dollar, mission-critical vendors. In a jam, however, you can stretch a landlord or a mortgage company 60 days and use the money to clear away people who will hound you to death over their $300 item.  Share your ideas below. We’d love to begin a dialog on this subject!

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