So, You Think You Are Running Your Business!

By G. Robert Claypool Vice President and Group Controller Certainteed Corp. Waco. Tx

Second Of Two Parts

The source of information required to develop a cash forecast is readily available from your current records. lt sinrply has to be organized in a logical ntanner.

When you first start lbrecasting cash requirements, you can nriss the estintate (forecast) b1" 20'X, to 30'1,. The Ionger you ntake forecasts. the closer your estimate will parallel actual requirements and after a few

Inventory

Cash Flow Problem

o Turnover too low o Obsolesence high o Direct purchasing o Damage increase o Something for everyone o Fear ofproduct pruning o Lack of merchandising o Failure to properly use wholesaler o Don't know product gross profit rate o Don't know product turnover o Don't know product R.O.l. o The "bargain" buy nronths you should achieve an accuracy range of 2oA to 5ttl,. Hou' do you solve your cash flow problems? First. a n'lanagenlent approach must be developed and employees must be aware of your policy. Second. an operaring strategy must be developed to deal with each identified cash flow problenr. An approach and strategy to solve some of the most common problems follows:

Management Approach

Deternrine objective - (7 to 8x )

Anall'ze slow moving products on quarterly basis

Analyze turnover reduction and carrying cost lf turnover objective cannot be met - eliminate or reduce to meet objective.

Determine products consistently damaged, establish clean warehouse policy. Use rotating stock plan.

Policy established on slow-moving or problem-oriented products.

Merchandise new products. high gross profit items and stage location to feature what you want to sell

Use wholesaler inventory as your own - keep stock to overlap delivery schedule of wholesaler by 2-3 (X).

Determine rate for all products and use replacement cost markup on cost Increases.

Establish turnover sheet by product and evaluate quarterly.

Determine gross profit on average inventory investment using annual data as initial information.

Determine why it is a bargain and length of time it will probably be in inventory

Operating Strategy

Measure performance of major selling products by using lurnover and gross margrn.

Use local wholesaler as inventory stocking source: promote out quarterly overstocked products: Mdse. "front end" plan.

lfdirect purchases turnover is less than 6 (X) annual (holding period over 2 months) - Buy lrom local wholesaler as required.

Train employees on handling: Watch level ofinventory: Rotate stocks by using: alternate bins: Sell as identified. do not stock pile.

Determine who buys and why and necessill, of carrying.

Review product pruning candidates at least annually and dispose of low R.O.l. products.

Keep displays clean & fresh, change lrequently, watch T/O "Front End" items, feature your winners - and losers (until out ofstock).

Have wholesaler work with you lo achieve T/O objective.

Make monthly cycle checks on selected products to verify performance.

Merchandise and promote slow movers - reduce purchasesmonitor sales.

Reduce purchase of low R.O.l. items or eliminate if required.

Promote and sell.

Accounts Receivable

o Collection period increasing o New customers

. Payment trends

. Push lor sales o What customer buys o Special terms

. customer profitability

Lagging collection effort

. Fear of shutting off

Gross Margin

o Margin declining o What is o Product mark-up required sales mix o Expense control

. Accounts payable

Determine objective based on tgrms - (35 days goal).

Establish criteria for approving credit and credit limit.

Review payment trends of selected accounts and analyze reasons for changes.

Set reasonable sales goals based on existing customer base and new customer potential. Review profitability by customer based upon products sold.

Caution! Grant special terms if margin is high enough to cover carrying cost or if vendor terms offset. Keep abreast of changing customer financial position. Visit customers periodically and observe activity.

Examine methods in use. change style and type of effort. Don't hesitate to use personal type letters.

Establish credit cut-olf policy and enforce!

Set margin objective based upon R.O.l. goals.

Establish R.O.l. goal and determine mark-up required for achievement.

Achieve proper nrix to get R.O.l. objective by sales enrphasis, advertising and merchandising.

Justify on payback basis all controllable expense additions.

Pay vendors within discount period if discount rate justifies. If not. pay on net lerms.

So you think you are running your business! You should be! But, your suppliers, customers, employees, accountant and banker are all part of the variable relationships that must be dealt with and you determine the outcome. Whether the business Droblem is one of cash flow or low return on investment, you can usually trace the source to lack of balance sheet management.

. In summary, let me leave you with this basic overvlew:

Cash flow and return on investment are a function of to whom you sell what you sell

If you watch to whom you sell. you will get sufficient price to make a satisfacrory gross margln collect your accounts receivable achieve your sales and profit goals lf you watch what you sell, you will

Review customers consistently paying beyond objective - call and frankly discuss the problem and advise customer ol policy.

Make certain credit is evaluated and obtain references extending beyond one year. Keep wjthin credit limit.

If external factors (i.e. weather) causing slowness, monitor carefully: If other factors seem present - contact accounts for explanation.

Keep customers within prudently established credit limits - Do not oversell customers ability to pay.

If customer buys low margin items and pays beyond terms, influence customer to buy other products carrying higher margin.

Calculate affect on profit on each situation considered.

Be prepared to adjust credit limit and respond to unusually large orders based on knowledge of customer operation.

Change approach occasionally to avoid the "familiarity syndrome." Inform owner when his effort is required.

Treat customers the same under cut-off policy. Provide for continued cash purchases with override to clear old balance.

Monitor all major product sales monthly. Make sure prices are being increused to offset cost increases and maintain margin. Analyze mark-up on products and determine if grouping (i.e., hardware) is on target.

Monitor sales and il mix changes. act immediately to stabilize so low margin products won't become primary sales.

Look for cost reduction, eff-iciency improvenrent. Do not add cost unless other options aren't available. Watch vendor ternrs. Negotiate special terms if possible. ln inventory increirse periods. trnre deliveries to maximize cash and extend Davment tin1e.

. provide proper service and substantially control out-of-stock problems

.

. keep your investment in inventory low and at a practical level

. increase your inventory turnover.

Those two rather simple statements, watching to whom you sell and watching what you sell, can make the profitable difference in your business.

So, you think you are running your business! You will be if practical controls are in use and sufficient information is available to plan for future periods and monitor performance against planned objectives.