Business Topics

Cash Flow Key to Business Sustainability

Cash flow is the lifeblood of every business. In fact, according to a recent U.S. Bank study, poor cash flow management causes 82 percent of U.S. business failures.  Although seemingly counter-intuitive, many experts advise putting cash flow management before profits.

While profits are how many steel, aluminum and copper distributors and processors survive, failure to manage the operation’s cash flow can mean running into problems that one profitable accounting period might not be able to offset. Another study, this one by Intuit, revealed 61 percent of small businesses around the world struggle with cash flow and 32 percent are unable to pay vendors, pay back loans or pay employees, due to cash flow issues.

Cash Flow Management 101
Basically, cash flow is nothing more than the movement of money in and out of the metal service center. Cash flows into the business from sales. Money flows out of the business for supplies, raw materials, overhead and salaries in the normal course of business.  

An adequate cash flow means a steady flow of money into the business in time to be used to pay those bills. How well the metals distribution or processing operation’s cash flow is managed can have a significant impact on the bottom line of the business.

More often than not, a metal service center’s cash inflows will lag behind its cash outflows, often leaving the business short of money. This shortage, or cash flow gap, represents an excessive outflow of cash that may not be covered by a cash inflow for weeks, months or even years.

Properly managing the service center operation’s cash flow allows that cash flow gap to be narrowed or closed completely before it reaches the crisis stage. This is usually accomplished by examining the different items that affect the operation’s cash flow.  This analysis can provide the answer to several important questions such as:

• How much cash does the business have?
• How much cash does the business need to operate – and when is it needed?
• Where does the business get its cash and spend it?
• How do the operation’s income and expenses affect the amount of cash needed to operate the business?

The ‘In’ of Cash Flow
In a perfect world, there would be a cash inflow every time there is an outflow of cash.  Unfortunately, this occurs very rarely in an imperfect business world. Thus, the need to manage the cash inflows and outflows of the business.

Obviously, accelerating cash inflows improves overall cash flow. After all, the quicker cash can be collected, the faster the business can spend it. Accelerating cash flow allows a business to pay its own bills and obligations on time, or even earlier than required.  It may also allow the business to take advantage of trade discounts offered by suppliers.

A key to improving the service center’s cash flow can be as simple as delaying all outflows of cash as long as possible. Naturally, the operation must meet its outflow obligations on time, but delaying outflows makes it possible to maximize the benefits of each dollar in the operation’s cash flow.  

Outflow
Outflows are the movement of money out of the business, usually as the result of paying expenses. If the business involves distributing or reselling goods and/or commodities, the largest outflow will most likely be for the purchase of inventory. A manufacturing business’s biggest outflows most likely involve the purchase of raw materials and other components needed for the manufacturing process.  Purchasing fixed assets, paying back loans and paying the operation’s bills are all cash outflows.

A service center executive can regain control over the operation’s finances by adopting best practices and proper tools. A good first step involves how the operation pays its bills.

Many credit cards have a cashback bonus program. Even if the program offers only 1 percent cash back, that could equate to a sizeable monthly amount for many businesses. Of course, because credit cards tend to have a higher interest rate, they should only be used if the balance can be quickly paid off in full.
Improving the invoicing process is another useful strategy. A metals service center or toll processor can adopt incentive strategies to be paid faster. Providing small, extra services might also work. Incentives might include discounts for early payments (balance paid before a certain date, or a weekly invoice vs. monthly) or greater flexibility.  

Some customers are just late payers and need to be nudged. The way dunning is handled can, however, greatly affect the collection process. Timing and the quality of message content are the two main factors in the success or failure of these prods.  

The manner in which a company gets paid not only affects its profitability, but also its cash flow. Paper checks remain as the standard method of payment. However, paper checks are slow, highly susceptible to fraud and bear hidden costs such as additional work and back-office processing. Something as simple as asking customers to switch to electronic funds transfer, along with providing incentives, etc., can result in faster, more secure, reliable and cheaper payments.

Improving Cash Flows
Profit doesn’t equate to cash flow because, as mentioned, cash flow and profit are not the same.  There are many factors that make up cash flow, such as inventory, taxes, expenses, accounts payable and accounts receivable.

The proper management of cash outflows requires tracking and managing the operation’s liabilities. Managing cash outflows also means following one simple, but basic rule: Pay your bills on time – but never pay bills before they are due.

Having a cash reserve can help any metals distributor survive the gaps in cash flow. Applying for a line of credit from the bank is one way to build that cash reserve. Once qualified, service centers can be granted a predetermined credit limit from lenders, which can be withdrawn from when needed.

Cash Flow Gaps
Remember, however, the cash flow gap in most metal center businesses represents only an outflow of cash that might not be covered by a cash flow inflow for weeks, months or even years. Any business, large or small, can experience a cash flow gap – it doesn’t necessarily mean the business is in financial trouble.
Some cash flow gaps are created intentionally. A company will sometimes purposefully spend more cash to achieve another financial result. A metals service center might, for example, purchase extra inventory to meet seasonal needs, to take advantage of a quantity or early-payment discount, to acquire additional equipment needed to make the operation more efficient, or it might spend extra cash to expand its business.  
Cash flow gaps are often filled by external financing sources: revolving lines of credit, bank loans and trade credit are just a few external options available.

Cash Flow Loans
Cash flow-based loans rely on the value of the operation’s cash flow. If the service center has a strong cash flow stream, it can be used to get significant loan amounts even if there are few business assets. Although cash flow loans can be expensive, they play a key role in a business that is expanding.
An advantage of cash flow loans is the repayment period. These loans are usually designed according to the needs of the borrower with repayment periods typically between five and seven years.

Flowing Cash Flows
Assessing the amounts, timing and uncertainty of cash flow should be the objective of every service center executive. Positive cash flow indicates the liquid assets of the service center are increasing, enabling it to settle debts, reinvest in its business, return money to shareholders, pay expenses and provide a buffer against unanticipated financial challenges. The impact of a negative cash flow can be profound with so many companies operating on margins so thin that frequent lost opportunities will put them on the path to closing their doors.

Every distributor can improve the cash flow of their operation. For this to happen, they need to adopt best practices in the way they invoice, follow up with customers and monitor outflow.  Without the help of a qualified professional, these best cash flow practices may be more difficult to achieve.

Every distributor can improve the cash flow of their operation. For this to happen, they need to adopt best practices in the way they invoice, follow up with customers and monitor outflow.  Without the help of a qualified professional, these best cash flow practices may be more difficult to achieve.

Mark Battersby is a freelance writer and consultant on tax and financial issues based in Ardmore, Pa. He can be reached at 610-789-2480 or by email at [email protected].