BeaconCFO Plus (BCP) had a client, a Cleveland-based machine shop that had been in business over 30 years, who was experiencing a flat top line. As a result of flat sales, the client was having cash flow issues.
BCP was able to quickly identify the complex set of challenges that led to the reduction in cash flow. The most common challenges were the result of the company not having a:
- 13-week cash flow forecast to provide enhanced planning horizons and improved cash position.
- 12-month rolling forecast to function as a planning tool to ensure projections for a profitable operation.
- Formalized accounts receivable collection process or billing procedure.
- Labor analysis to increase productivity, reduce overtime and update job duties.
BCP worked with the client to first identify cash drains to the system, which included reducing overall inventory, extending payment cycles to their own internal DSO cycle and reducing overtime.
A 13-week cash flow forecast was developed after analyzing accounts receivable, inventory, purchases and one-time payments. The client’s management team all made meaningful contributions to help create the document. The forecast was shared with the bank, which was very satisfied with the finished document.
In purchasing, a process that required inventory checks prior to a purchase being approved was created and implemented. Quarterly one-time payments were identified and scheduled for payment at different times to alleviate excessive demands on cash.
Additionally, BCP performed an in-depth labor analysis that resulted in a reduction of overtime, combination of job duties and a reduction within the production workforce, improving profitability. A review of the production process revealed that several machines were idle or not running all the time. As a result, improvements were made to reconfigure the machines so one operator could manage them efficiently. Overtime was also analyzed as a percentage of sales—BCP determined it remained the same regardless of the level of sales. Finally, an approval process was instituted to control overtime costs and a second shift was introduced on several machines.
BCP assigned an accounting clerk to invoice on a daily basis and perform a weekly review of accounts receivable with the president. Invoicing had previously been done on a weekly basis. Implementing this change reduced the cash collection cycle, thereby improving the company’s cash flow.
BCP worked with senior management to develop a 12-month operating budget (the first one ever completed by the company). This budget allowed the company to:
- Clearly identify sales strengths
- Improve scheduling procedures
- Create actionable quarterly inventory reports
- Produce a focused plan for implementing labor increases
The new cash flow forecast and operating budget were presented to the company’s bank. Immediate improvements in total labor costs were noted and identified. A seven-point profit improvement process was developed, which identified responsible parties and expected completion dates.
As a result, the bank increased the company’s line of credit based on the enhanced operating and cash forecasts. In addition, management had a great set of tools to run a successful business. Not too long after implementing these improvements, the company was sold and the owner received a great outcome.
Ultimately, by providing part-time CFO services, BCP was able to analyze, restructure and implement the processes, tools and infrastructure improvements to fix the cash flow problem.