Topic: Manufacturing

Subject: Cash Flow Management
Frank Armenio
Member: 2002
Posts:1
Submitted on 02-12-11 6:04 pm
Message:
I work as a CFO for an organization that is a manufacturer and been in business since for over 20 years. They have had a very successful business selling products to the government and been very profitable. During the last year they introduced a new product with new technology. The organization (before I arrived) signed a supplier agreement and entered into a purchase order for enough components to build 9000 units. In addition, they already built 1000 units on the shelf that are not selling anywhere near the rate that the President and Chairmen anticipated. Only a couple of hundred units have been sold to date. Obviously this has been a significant drain on cash flow since no revenue is coming in to support the infrastructure (e.g. materials, people, space, overhead, etc.). The organization has not exactly following lean manufacturing concepts and the line of credit is near capacity.

I have prepared a bottoms-up budget for 2011 including a cash budget and determined a cash flow break even point for camera sales. I have urged to Chairman and President to that they need to take action ASAP to align the revenue with the expenses before there is a point of no return in the cash flow situation. The frustration I am encountering is that I cannot seem to get the President and Chairman to take the situation seriously enough to take appropriate action. The belief is that large quantities of units will eventually sell. I would like to know if any FENG member has been in this situation and some advice on how to proceed.

Your comments would be appreciated.
 
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Replies
Mike Moles
Member: 2010
Posts: 11

Subject: Re:Cash Flow Management

Submitted on 02-14-11 11:21 am.
Message:
Frank - I am a CFO for a mid-size manufacturing company, we prepare a cash flow report that is sent out to the executive management team daily. The report is very simple and shows cash balances and sources an uses of funds (including checks written but not cleared). Seeing cash on a daily basis definitely raises questions, especially if it's being depleted and it has over the years pushed management into taking preventative measures to improve cash crunch situations. The Board gets a monthly snapshot and the quarterly shareholder distributions are based on cash positions at that time so they feel the pain if cash flow is not managed effectively (and that in turn motivates the management team to align their goals with that of the Board).

In your case I think frequent communication and transparency is key, I find that the less complicated I make the reporting the more effective I am at raising issues. Using graphs helps also, seeing for example DSO or inventory trending the wrong way helps to encourage discussions and action with the management team.

Mike





 
Bruce Benes
Member: 2011
Posts: 2

Subject: Re:Cash Flow Management

Submitted on 02-17-11 11:30 pm.
Message:
In addition to Mike's comments, you may also want to focus on the loan covenants. In today's environment, banks are not tolerant of any violations of loan covenants. If you've done the cash flow budget, then you have a balance sheet budget where you can calculate all the line of credit covenants. If there is an anticipated violation of covenants when the LOC comes up for renewal, it may be grounds to not be renewed.

If the LOC is at max, you are also likely headed for trouble in meeting payables and possibly other key expenses ( debt, payroll, owner draws, etc.) Using a 13 week cash plan can be helpful in highlighting when the crash may happen. I'd be happy to share my 13 week spreadsheet with you if you need one.

Bruce
 
Jim Schwartz
Member: 1999
Posts: 21

Subject: Re:Cash Flow Management

Submitted on 02-18-11 9:35 pm.
Message:
Both of the earlier comments offer excellent ideas. Another consideration: lenders really dislike surprises. The strategy of keeping them informed and making them your partner in order to work through a problem together may be appropriate. One reaction could be an increase in the size of the line of credit. However, that works best if the line is unsecured. If the company is borrowing on a formula tied to receivables and, possibly, inventory, an increase in the line may not be an effective solution.

Another step is to start talking with key execs/owners about how the business will meet cash needs if sales don't ramp up as they hope. The most obvious choices are putting in additional equity or getting a term loan. A term loan can buy breathing room with the bank while sales grow, allow owners to sleep better and provide a more permanent layer of capital than a working capital line.

The scenario you describe is not unusual. In my experience, projections of sales growth from new product lines, adding customer finance programs, etc. are frequently optimistic by a factor of two or three times.
 
Anna Agnew
Member: 2007
Posts: 1

Subject: Re:Cash Flow Management

Submitted on 02-23-11 5:55 pm.
Message:
The President may respond if you show historical and forecast for the company's cash conversion cycle. This approach has helped non-finance business owners understand their operating cycle, and it's impact on cash.
 
George Frederick
Member: 2006
Posts: 3

Subject: Re:Cash Flow Management

Submitted on 03-06-11 10:14 pm.
Message:
Hi Bruce,

I have a similar spreadsheet which I use to manage cash. This is something I developed on my own and it has served me well over the years. I usually take it out 8 +++ weeks depending upon our current cash position.

I would, however, be interested in seeing your spreadsheet if you don't mind sharing. My e-mail is georgefrederick@earthlink.net. Thanks!

George Frederick
 
George Frederick
Member: 2006
Posts: 3

Subject: Re:Cash Flow Management

Submitted on 03-06-11 11:00 pm.
Message:
Hi Frank,

It’s hard to comment on your situation with the limited amount of information. This certainly doesn’t sound like a company that’s been in business for 20 years. I agree with the others, more frequent communication and enhanced transparency will likely help.

I definitely agree with Bruce. You definitely don’t want to violate your loan covenants. The term loan that Jim suggests will only work if you have some sort of collateral. Besides that, a term loan is only going to postpone the inevitable if you continue to produce huge quantities of a product that doesn’t sell.

I would continue to confront President and Chairman with the facts on a frequent basis and hope that you can prevent further production of the units until sales catch up. This would then curtail your component purchases.

Lastly, I would review the legal terminology incorporated into your component purchase orders and identify the vendors. I would inform the vendors of your concerns as soon as possible so they can limit their own exposure. In most cases, vendors will work with you as long as they have not suffered any irreparable damages. They will either allow you to reduce the quantity or give you more time to fulfill your commitment. You are their customer and they don’t want to loose you. Further, litigation is messy, and nobody wins if you are forced into chapter 11.

George
 
Peter Indiveri
Member: 2011
Posts: 2

Subject: Re:Cash Flow Management

Submitted on 03-10-11 1:52 pm.
Message:
Frank,

I have over 20 years experience in senior financial management roles in global manufacturing, retail and service industries (including 3 successful turnarounds). Managing (enhancing) cash flow has always been the #1 issue regardless of industry. The tool I developed years ago (which several members have spoken to), is a 52 week rolling cash flow. The keys to successfully using it are: convert your GAAP financials to a cash basis, tie this to your loan formula(s), roll both your revenue and CASH receipts (you need to roll A/R as well) projections from historical data. The last section will be your book vs. bank (to account for float) reconciliation. When you are done, the one line that will stand out is the excess(deficit) availability on your revolver. (I note any deficit in red.) Before presenting this document to the Executive committee, have a developed strategic/crisis management plan to speak to. The key discussion point(s) will be (based on the size of the deficit) what are the ramifications of the current projection, covenant default, personal guarantor in default, making payroll? these issues will garner the attention of the executive management. Please let me know if you have further questions. Good Luck.

Peter Indiveri
 
Walter Carter
Member: 2003
Posts: 4

Subject: Re:Cash Flow Management

Submitted on 03-24-11 11:12 am.
Message:
Lots of great comments here!

A few other things to consider:
1) Can you get an order/usage schedule from that key customer?
2) Is there any chance of your auditors forcing a impairment/writedown on the slow moving inventory?
3) Is there a chance there will be a technological change that could render the inventory on the shelf obsolete?

Likewise, I have used spreadsheets to project forward the financials and translate that into cash flow and subsequent potential loan covenant issues. Yesterday, I had a demo of an easy software solution that functions like the spreadsheets we have all used, but it has been professionally developed and well vetted by its usage in many different organizations. And it is cheap!

Consider the bullets above and if you want info on the software, send me a note to wdcarter1@comcast.net as I do not check these forums often. I can pull up the contact I have for you.

Walter Carter, CTP
Great Enterprises Consulting LLC
 
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