BUSINESS TIPS: How to Relieve Cash Flow Stress in 2006


© 2005 Door & Access Systems
Publish Date: Winter 2005
Author: Bruce McConnell
Page 72


How to Relieve Cash Flow Stress in 2006
By Bruce McConnell

How much of your 2005 work week was spent chasing after customer payments, running to the bank to make deposits before 3 p.m., and asking your door suppliers to hold checks? Worse yet, how much of your time was spent apologizing and explaining to your vendors when all of these efforts failed?

If these scenarios sound familiar, you need to make some changes in 2006. Some of these changes may include raising your door prices, increasing your service rates, and adding a fuel surcharge. However, these may not be soon enough to relieve all of the cash pressures of daily operations.

Create a Cash Cushion

Even if you are profitable, your cash and working capital dollars have a tendency to become trapped in places other than your checkbook, preventing you from paying your bills on time. Although this is very normal, it’s frustrating when your cash is not where you need it to be. For this reason, you need to find a way to create a cash cushion, so that normal business operations can run efficiently.

If you expect your profitability and sales to remain stable, use this confidence to ask your banker for some working capital relief. This may involve a complete refinancing or a simple request for a line of credit. Done correctly, this strategy can help improve profitability, too. Plus, you can add a significant amount of cash to your business by taking vendor discounts.

You may be concerned with the additional interest cost of this financing, but the benefits gained from the use of new funds can far outweigh those costs. The new proceeds may reduce or even eliminate this additional interest cost.

Distraction Cost

In my 20+ years of credit management, I have seen how the time wasted on cash flow problems can really take its toll on door dealers. It’s not uncommon for key personnel to constantly scramble to make sure that daily bank deposits cover outstanding checks to vendors.

This “distraction cost” occurs when key personnel cannot do the jobs they were hired to do, diminishing their ability to generate revenue or maintain efficiencies. The “cost” is the lack of results in these crucial areas. If left unchecked, this cost can really start to add up.

A New York State of Mind

For example, I worked with a dealer in New York who was always at or over his credit limit with his door supplier. His strong growth in his market and tight cash position contributed to his credit problem.

Prior to each door order, he was required to send a certified check so that his doors could be released for manufacturing and shipment. Thus, for every order, everyone in his office had to drop everything else, make collection calls to customers, and go pick up these payments until he collected enough money to cover the certified check.

This dealer was not losing money. Rather, he was growing so fast that all of his new profits, when finally collected, had to be plowed back into his Inventory and Accounts Receivable. It was very difficult for him to get ahead.

Fixing the Problem

During one of our weekly and not-always-friendly discussions about his next load, I offered to help him find a source of additional working capital. After a few minutes, it was clear that he had never thought about fixing the problem.

We discussed asking for a line of credit from his banker, but he thought that the bank would perceive his tight cash flow problem as a negative. After some encouragement, we prepared a brief package for his banker and included a Profit and Cash Flow Projection. The package described how the loan would be structured and easily repaid.

The banker was very willing to help. The bank discovered that the business facility, which belonged to the dealer, had greatly appreciated in the last five years. As a result, the dealer had accumulated substantial equity that allowed the banker to extend an additional $50,000 loan.

In the end, the loan freed the dealer to devote more time to sales and efficiencies. By earning vendor discounts and eliminating late fees, this New York dealer improved his profits and simplified his life.

Bruce McConnell is available at 815-288-3556 or at