In our personal lives, cash flow is critical to the management of our finances and affairs. In business, it’s the very first thing I look at when I’m called to provide financial guidance and deliver operational improvements. My clientele includes small and lower middle market companies in distress mode or growth mode.
As managing partner at ACM Capital Partners, it’s my job and my passion to help these businesses find their way forward. I’ve helped more than 85 South Florida businesses do just that in the past three years.
Cash flow is the lifeblood of any business and as such, positive cash flow is always a great first indicator of success – you can’t have growth without it. Understanding that is the easy part.
Once cash flow is established, I take them through a multi-step process to put them on the right path for sustained growth – whether they’re already in position for growth or not. You can walk yourself through these phases, as well.
I have a three-pronged approach with growth companies, and a slightly different three-pronged approach for those in distress.
Let’s start with growth companies. Each time I meet with a client in this situation, we start by evaluating customer profitability.
This phase is as layered as it is deep. It goes beyond the direct costs of services or products and into the realm of indirect costs that could realistically be attributed to each customer.
For example, a customer may be generating high volume for your business, but could actually be hurting your bottom line if they’re buyers of low-margin products that require significant hands-on assistance.
Going through this exercise does a couple of things. First, it helps to identify the areas that you’re actually generating a profit, not just revenue. Second, it forces you to look at the business model and determine which ways it could be restructured to generate productivity and profitability for each customer – the types of moves that will sustain the business for the long haul.
The second thing I discuss with my growth clients is ensuring that the business’ functional areas can support growth. Whether it’s securing the proper physical resources or staff, it’s a critical turning point in plotting their growth plan – you can’t build a house without a firm foundation.
Lastly, it’s important to make sense of the capital/cash requirements to support long-term growth. Ideally, the business’ growth opportunities will already be supported by available capital, but if not, we work to identify cost cutting measures or outside capital sources to drive growth.
We use a similar approach with distressed businesses, though with some key differences. Customer profitability is again the first item of discussion, but often comes with the decision to change pricing models, or even terminate relationships with unprofitable customers.
While is can be a difficult exercise to go through, more times than not, we have found that walking customers through the numbers associated with their business can be a fruitful exercise. Often times, despite your need to raise costs, they’ll stick with you because they appreciate the working relationship and know they might have to pay more elsewhere, anyway.
Second, you need to identify areas of “cash burn” for the business – and stop the burn. Start with eliminating the low-hanging fruit, non-essential expenditures, and ensure that the business isn’t spending more than it’s taking in. This can involve hiring someone to help you make critical non-biased assessments, or looking at health insurance costs, for example.
Many businesses find that the company can restructure their health insurance program to a higher deductible to save on premiums. And as the business recovers, those savings pay off big time.
One of my clients was heavily invested in research and development (R&D) when they were in cash burn mode. R&D was valuable to their business, but not more valuable than survival. And as such, we cut the R&D budget until we could right the ship.
Finally, I help my clients create and strictly adhere to their weekly cash forecast which prioritizes payments to critical vendors. This is a necessary discipline, and we also ensure safeguarding of assets; maintaining dominion over cash, ensuring dual control on all transactions, and implementing or enforcing an employee crime and theft policy, as well.
Nobody said business would be easy, but it is good to know someone is here to help.