Bob Greenwood: Cash management is critical during changing times
I’m not trying to be facetious with the title.
I want to bring awareness to Balance Sheet management and its importance to your wellbeing.
You should have today a cash balance (current account balance) objective to achieve (or be close to) by the end of your year.
It is not always easy, however, without an objective nothing is achieved.
Better to have a target to aim for then nothing at all.
When cash is tight due to high receivables and/or poorly planned investments in equipment, inventory or new expenditures, management’s attitude and approach to business can become exceptionally negative.
Management will adopt a tendency to blame normal business operating expenses as a culprit and “we must cut back” or a “we can do without” attitude settles in.
That attitude can become a cancer to the business moving forward and in turn direct the business down a path with negative long term results.
We must look at all reasons the company’s cash position is tight and one factor is examining the following short Balance-sheet check-list.
It is a worthwhile exercise.
- Are the accounts receivable within the 20% of average monthly sales guideline (average monthly sales over the past six months)? If not then a strategic plan must be put in place immediately and it usually involves a one on one discussion with certain accounts and their payment habits. It is normal not to enjoy that experience; however, the account(s) is/are affecting the well-being of the company, its employees and management’s attitude which in turn affects the quality and service levels to its clientele so address it professionally and get it done.
- Are all inventory lines being reviewed and “cleaned” on a regular basis. Stocking the right parts level for your normal clientele is critical, however, tying up cash on the shelf collecting dust is poor business management not someone else’s fault. Review all lines to ensure the right inventory is in the shop and stocked at the proper turn-earn index level. (300 divided by the GP% of the product line states the number of annual desired turns) Example 300 divided by a 50%GP return = 6 as to how many turns per year should be achieved on that line. Anything less than that is telling you that line is overstocked and consuming your cash.
- Equipment, facility and software upgrades are big ones which can consume a lot of cash. In the fast paced aftermarket field that we are in, additions must be properly planned. Trying to make quick decisions at the last moment because they have been put off can be disastrous to the business as little research time is allowed coupled with no real proper planning for the expenditure is in place. Establish a business improvement “budget” each year and set the cash aside in a savings account on a daily, weekly or monthly basis. Try this trick……$10 per R/O…..(irrelevant the amount of the R/O); very simple yet can be very effective over time when the discipline is put into place.
Each shop has to tailor their business to obtain specific results. You can do this.
Staying on top of industry issues, trend lines, coupled with business strategy and support is available today, however, only you know your clientele and what is required to WOW them into long-term loyalty.
It is about the client experience — so facility, the right equipment and shop culture all come into play and all these things take cash to execute well.
Keep it simple and start with the suggestions in this letter.
When you follow through, your business can be in a much healthier position sooner than you think.
Now that is a true ROI.
Bob Greenwood, AAM, is president and CEO of the Automotive Aftermarket E-Learning Centre Ltd., in Langley, British Columbia, Canada. You can reach Bob at email@example.com.