We were tremendously excited!
We had just completed the acquisition of a company that had great, complementary technical capabilities, a broader geographic footprint, new customers, and accretive profitability.
The CFO and I took over day to day management of the acquired company. A few weeks after the excitement of the acquisition had died down the CFO called me into his office.
“We are out of cash. Next week we have to decide to either pay the employees or pay our suppliers. We don’t have enough cash to do both.” How could we be missing cash?
We were in trouble.
What happened to the cash? How were we going to become solvent again and keep the business afloat for the long term?
It was another case for the Supply Chain Detective™!
The Mystery … Where Is The Missing Cash?
We had certainly done our due diligence during the acquisition. And our majority shareholders were experts in acquisition and they were completely in step with us during the entire process. There was no indication that there was a problem with cash flow at that time.
And while it may sound cliche, it is absolutely true that in running a business that “Cash is King“! Without cash you can’t pay your bills and your business will quickly falter.
But now we had a horrible decision to make … do you pay your employees or do you pay your suppliers? It was certainly a Catch-22.
Even more importantly we had to restore positive, ongoing and sustainable long term cash flow to the organization.
So what had happened to get us into this mess?
Root Causes Draining Cash Flow
A subtle decision that was made shortly after the acquisition was that the new company would be held, and operated, at arm’s length from the parent company. This mean that the new company would have to be self sufficient from a cash standpoint. On top of that the new company would have to repay the parent company all costs of the acquisition. And on top of that the parent company would be allocating a portion of corporate expenses to the acquired company.
Given that these additional parameters and conditions were put on the back of the newly acquired company, what had previously been a solid, going concern was now a company with an insufficient cash flow structure to keep the business afloat.
We were also faced with some realities that made the new business both attractive, but cash starved. There were some new customers coming on board with enormous growth potential and revenue upside. But these customers would require huge upfront out of pocket capital, inventory and resource investments to enable this business. Cash was further stretched because these customers wanted Accounts Receivable terms which ended up in us getting paid later than new supplier Accounts Payable terms which required us to pay suppliers before we got paid by our customers.
From a process perspective we found that not only were the Accounts Receivable terms and Accounts Payable terms out of alignment, but the processes surrounding the active collection of A/R, and management of A/P were somewhat nonexistent.
On top of that our due diligence revealed a number of investments and general business improvements that we had to make, which prior ownership had procrastinated in undertaking. The operations had been run very lean, from a cost standpoint, but that meant that investments to improve efficiency (and lower cost even further) were ignored.
The final problem resided with our employees and the culture in the new company. There was virtually no general understanding of the importance of cash flow and proactive cash management.
The strain and drain on cash was real, imminent, and alarming.
Solving the Case of the Missing Cash!
Supply Chain is uniquely positioned in most organizations for the management of Cash flow. Given that the Supply Chain team negotiates terms, conditions, and parameters with suppliers, and manages inventory, they are impacting cash flow in dramatic ways.
Cash Management certainly requires Finance and other parts of an organization. But a strong Cash management process, and strategy requires Supply Chain leadership. And when cash flow is in trouble it requires a Supply Chain Detective™. You can never afford to be missing cash.
For instance, Accounts Payable payment terms are set by Supply Chain for all products and services purchased by a company. This in turn can influence the level of Accounts Receivable terms that are extended to customers. And Supply Chain sets terms such as lead times, minimum order quantities (MOQs), transit times and more, all of which determine how much inventory (and hence tied up cash) that a company will have.
The CFO and I created a plan, both short term and long term.
The Immediate Action Plan
For the immediate crisis we determined that we had to pay the employees. The key suppliers were called, we explained the situation, and we asked for a little more time. We would repeat this cycle for the next few months, calling on different suppliers to understand and help us, until we had the situation back under control.
There were some suppliers who didn’t buy in. They wanted payment on time. We prioritized these and made sure that we didn’t do anything that would jeopardize the continuity of supply of materials needed to enable us to make and ship the products which were at the core of the business.
We then got the entire Management team together. We needed a culture focussed on Cash flow management. We educated them on Cash flow, explained our situation, and laid out a plan of attack with a series of actions that we needed everyone to own, implement and track to completion.
This constituted the tactical plan of attack we needed to get our Cash flow back to positive.T
Restoring Ongoing Positive Cash Flow
In parallel we launched a set of actions designed to restore Cash flow on an ongoing basis.
We started with an analysis of Account Receivable and Accounts Payable terms to identify areas of misalignment. For any particular product we could determine the A/R term for that customer, and then create a summarized A/P term for all of the suppliers of materials used to make that product. This allowed us to identify customers and suppliers for which we needed to negotiate better terms. This became a plan of attack for our Procurement team.
We instituted a regular Cash flow management and reporting review process. Key leaders from the organization were in attendance. We could identify in real time which Customers were, or would be, late in paying us and establish actions to contact them before this became a problem.
We identified situations wherein we were paying suppliers earlier than required due to infrequent payment cycles in A/P. This caused us to tighten our process controls to ensure not only that we didn’t pay early, but that we didn’t pay late.
Our Cash management process also incorporated all expenditures being made or planned by the organization. This included outlays of cash for capital expenditures and inventory to ensure there were no surprises to our cash levels.
On the inventory front we implemented a series of actions to reduce lead times, reduce MOQs, create more Vendor Managed Inventory (VMI) programs, reduce the number of single source suppliers, dispose of Excess and Obsolete inventory, and improve our inventory turnover and reduce our inventory days of supply. A dramatic improvement in inventory turnover would significantly reduce the amount of cash we would have tied up on warehouse shelves.
We also included benchmark targets for our Cash conversion cycle as well as Return on Invested Capital (ROIC), A/R days, A/P days and Inventory turns. These targets were highly visible, with ownership assigned for each element, and accountability to create, implement and review action plans to meet or exceed these benchmarks.
With this new and ongoing focus on Cash we created a culture that was highly focused on cash.
Within a couple of months we had got ourselves beyond the crisis that started this whole situation and we no longer had to decide whether to pay suppliers or employees from week to week. We did not need to rely on credit cards for other expenses. We were afloat.
And within a year all of our strategic actions had kicked in. We were in a position that was generating lots of cash on an ongoing basis with a strong foundation in place to ensure positive cash flow. We would never again be missing cash.
The Supply Chain Detective™ approach enabled us to identify the problems, and come up with a set of tactical and strategic plans to solve the missing cash mystery.
The greatest reward was not only the fantastic evolution of our employees and our organization, but that at the end of our first year, when the parent company was in need of cash we were able to move cash up to them and make a positive contribution.
As has been said a thousand times before, Cash is King! Never lose sight of that fact. Be proactive. And you will position your company for long term survival.