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In the Business Section of the Tulsa World, ClearRidge was invited to contribute the Business Viewpoint Article.
There are some basic strategies to boost the financial health of your business. In these tough economic times, you might want to try these seven steps.
1. Reduce receivables and extend payables
Change to a system of collecting early and paying late. If your average collection time (receivables) is 62 days and your average time paying vendors (payables) is 22 days, then you are financing your customers 40 days longer than your suppliers are financing you. Unless you get an early payment discount, your payables should be 40 days or more. Get your industry norms for payables and receivables from your local library, or access the data from the Risk Management Association at tulsaworld.com/rma.
2. Increase inventory turnover
Unless your business sells large-ticket items, your inventory should turn over at least four to six times per year, maybe even 12 to 20 times per year for a high-volume, low-cost distributor. Go to the RMA for industry norms, and make sure you're at least within your industry average. If you have low inventory turnover, you are keeping too many dollars invested in inventory, which means you are financing your inventory, which raises the cost.
3. Cash projections
Regular cash planning allows you to adjust for cash shortfalls in advance and avoid unnecessary costs. The best practice is a rolling 13-month and rolling 13-week cash forecast. You should get to the stage where you can predict the exact
week that you're going to run low on cash and struggle to meet payroll or other expenses that harm your business.
When you identify a future cash shortage, you can choose to cut expenses, raise prices, speed up payment from customers, stall payments to vendors, or get a short-term loan or credit line. Advance forecasts give you time to prepare for problems without causing unnecessary expenses.
And, if you do need to talk to lenders for financing, you can present them with accurate forecasts.
4. Renegotiate and refinance debt
Use the forecasting techniques described above to determine whether you can stay within the covenants of your credit agreements. You should be able to predict the week when your profit-to-debt ratio falls below the required level. Then you can impress lenders with clear and accurate projections
5. Lose your worst customers
Analyze your customers by the following: revenue and gross margin they generate; their time in receivables; the disruption they cause to your business; the extra attention or special provisions they require; the cost of servicing them; and referrals and positive image they generate for your company. Take the bottom 20 percent of customers and create a model to determine the impact of cutting the bottom twenty percent and later replacing them with better customers.
6. Renegotiate with suppliers
Renegotiate with your suppliers and request extended terms. Try buying in advance of a sales promotion and paying after the promotion so you have a chance to sell the product before you pay for it. Solicit bids from alternative suppliers to get a better deal.
Consider the total margin cost of the supply chain. If you need to reduce prices for customers, request that your suppliers meet some of the cost. Analyze the margin that is being received along the supply chain for the value that each supplier brings and compare to industry norms. Value is not only about cost. A higher-value supplier could supply better products, better warranty, more features and longer product life.
7. Improve technology utilization
Use technology for all routine and repetitive operating and administrative tasks. This will free up your employees' time to add value to relationships with customers and suppliers, and get extra training. Increased use of technology should lead to increased productivity per employee.
Once you have finished all seven steps, build a system to regularly monitor all of the key indicators of your business' performance that are described above. Once this is finished, make these best practices your company's standard practices.
All rights reserved. Copyright ClearRidge Capital, LLC, 2008.
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