| I had just started work for a company with cash flow | | | | much do I have in money market accounts, CDs or |
| problems when the assistant controller presented me | | | | other short-term investments that tap quickly? Are |
| with a list of invoices to be paid. When I asked her | | | | these reserves adequate to cover my cash flow |
| how she intended to pay them she responded, "I | | | | needs for the coming quarter or six months? If not, |
| figured you were fixin' to hunt up some cash." | | | | how much cash do I need? |
| Her response raises an interesting question "How | | | | Accounts receivable - My accounts receivables range |
| many sources of cash can you name?" This question | | | | from $_______ to $_________ during the course |
| normally elicits a list of external financing sources. | | | | of the year. What is the maximum limit on my credit |
| Banks, asset-based lenders, leasing companies and | | | | line? Is this less than 80% of my typical accounts |
| venture capital firms are some of the first to come to | | | | receivable balance (exclude any receivables that are |
| mind. Often the best sources are less obvious and | | | | 90 days old or older, banks won't lend on them)? If so, I |
| considerably less expensive. Here's an example. | | | | may have an opportunity to increase my credit line. |
| Client example | | | | Inventory - Banks will typically only lend on raw |
| A client asked me to attend a meeting in which an | | | | materials and finished goods inventory, not work in |
| equipment manufacturer outlined his equipment leasing | | | | progress. The maximum they'll typically lend is 50% of |
| program. After the meeting, the client said that he | | | | the inventory value (cost, not sales price). Is my |
| preferred to purchase the equipment. The only reason | | | | inventory being used as collateral on my line of credit? |
| he was considering leasing was that he was | | | | If so, when combined with my accounts receivable |
| concerned about the relationship with his bank. He had | | | | total, can I increase my line of credit? |
| been to the bank frequently in recent months and felt | | | | Real estate - Has the value of my real estate been |
| that another loan request might damage that | | | | appreciating or declining? How much of the original loan |
| relationship. | | | | have I repaid? Do I have a second mortgage on the |
| With those facts in mind, I examined his balance sheet | | | | property? When I compare the market value of my |
| looking for alternative sources of funds. The result? | | | | property to the outstanding debt on this property do I |
| We were able to finance half the purchase price using | | | | have additional collateral value that I can use in the |
| previously uncollected interest on coupon bonds. The | | | | future? If the answer is "yes" and you're in a low |
| balance was borrowed from the cash value of his life | | | | interest market it may be a good time to refinance. If |
| insurance policies, at the bargain rate of 5% per year. | | | | interest rates are high, you may want to set a target |
| Most business owners have similar untapped cash | | | | rate at which it makes sense to refinance? |
| reserves. Many are overlooked because they are not | | | | Equipment - What's the resale value of my |
| an integral part of the daily operation, others because | | | | equipment? How does this compare with the loan |
| the underlying assets are less liquid. Whatever the | | | | balances remaining on this equipment? Does the value |
| reason, these reserves represent valuable financing | | | | of the equipment being used as security on these |
| alternatives. | | | | loans exceed $2 for every $1 of loan amount? If it |
| Huntin' cash | | | | does, you may be able to refinance this equipment and |
| You can locate these reserves by reviewing your | | | | free more cash. |
| balance sheet from a cash flow perspective. Examine | | | | In addition to investigating the financing arrangements |
| the life cycle of each asset; determine at which stages | | | | involved with each of these assets, you should be |
| in the cycle the asset can be converted to cash and | | | | looking at their utilization. Ask yourself these questions? |
| how that conversion can be made. Be creative! Use | | | | Accounts receivable - Do I have an effective process |
| your talent for spotting opportunities to assist you in | | | | for assuring timely payment from customers? That |
| developing this list. | | | | goes beyond good collection procedures to identifying |
| Don't exclude an asset simply because it is security for | | | | your ideal customers and eliminating practices that |
| a loan. Many companies have pledged more collateral | | | | annoy your customers. |
| than necessary to secure the loan. Excess collateral | | | | Inventory - How many times a year do I turn my |
| occurs where growth in receivables and inventory | | | | inventory? Is this faster or slower than the industry |
| outpace the growth in the credit line. Similarly, the | | | | average? What can I do to reduce inventory levels |
| appreciation of an asset such as real estate when | | | | without sacrificing customer loyalty? How can I |
| coupled with principal repayment, results in | | | | generate additional sales without increasing the amount |
| over-collateralization of the loan. Even equipment, | | | | of inventory I carry? |
| which depreciates in value, may be available as | | | | Equipment - What volume of revenues am I |
| collateral if you opted for an aggressive repayment | | | | generating with this equipment? What volume could I |
| schedule when you acquired the asset. | | | | generate given the equipment I own? Do I have |
| Once you have completed your list, examine the | | | | equipment that is idle more than 30% of the time? If |
| conditions under which each asset has its greatest | | | | so, should I sell the equipment and outsource this part |
| value. | | | | of the process, lease the equipment as needed or |
| - Equipment will have greater collateral value in an | | | | generate more sales? |
| economy where plant utilization is nearing full capacity. | | | | Real estate - What's the trend in the real estate |
| - Real estate is typically more valuable when long-term | | | | market in my area? Are there early indicators that the |
| interest rates are low and less valuable when those | | | | area is declining or that interest rates are more likely to |
| rates are high. | | | | rise than fall? Should I sell this real estate or simply |
| - Receivables and inventory lose some of their | | | | refinance it? |
| collateral value when tight money reduces sales and | | | | As you can see there are many ways to generate |
| slows receipts. That's when the quality (collectibility) of | | | | cash within your organization. There are also economic |
| receivables declines and the risk of inventory | | | | factors that affect the value of those assets and the |
| obsolescence increases. | | | | timing of their use in generating cash. |
| A systematic approach | | | | The next time you're "fixin' to hunt up some cash" use |
| At least once each quarter review your balance sheet | | | | this checklist to help you generate cash quickly and |
| from a cash flow perspective. Here are some | | | | inexpensively. Better yet, make this a monthly or |
| questions to ask yourself or your accountant about | | | | quarterly habit and you'll always know where to turn |
| the various assets your business owns. | | | | when the need for cash arises, as it always does. |
| Cash - How much cash do I have on hand? How | | | | |