BuildingCo was constantly in a cash crunch.
The company manufactured a line of building products, had one production facility that supplied 12 regional warehouse/distribution centers and was founded by two entrepreneurs. BuildingCo was well positioned in a steadily growing (at the time) geographical region of the US. To help fund the company’s growth, management used a combination of outside capital from 2 private equity groups, mezzanine and senior debt.
However, as the velocity of growth accelerated, the company regularly bumped up against their line of credit availability.
They were running on cash fumes.
Pete, the CEO/Co-Founder, grew weary of his company’s cash flow problem. He had a simple solution…get a new slug of equity into the business from the 2 private equity funds and BuildingCo would be free from their growth shackles.
Sounds like an easy solution. Draw up the paperwork.
However, the private equity guys ‘suggested’ a different approach to Pete.
The investors flat out refused to put any more equity into the business to simply ‘fund operations and fund growth’. NO! was their answer to Pete’s request for a handout. And, the company’s senior lender refused to expand the line of credit.
Pete and his senior team were told in no uncertain terms to clean up the balance sheet and the company’s operations. This is when I entered the picture.
BuildingCo’s Cash Flow Diagnosis
Solid, steady growth can consume cash, but at some point, solid steady growth should ultimately start to throw off lots of cash.
Fixing a ‘cash problem’ can sometimes be a relatively simple exercise:
- trim the inventory
- collect old receivables
- cut unnecessary spending
BuildingCo’s issues were more complex. This was a large company that:
- was being managed with outdated methods and systems
- had operational processes, manufacturing operations, inventory controls and the overall management of working capital that did not keep pace with their expansion
- had a freewheeling, entrepreneurial culture that was taking them down
- they were Stuck in a Maze and Stuck in the Rough
The Cash Flow Remedies
The ‘cash generation project’ became a collective, team effort. We set in motion a multi-faceted set of action steps that were designed to create lasting, not short term, fixes:
- flushed the excess, slow moving inventory out of each branch location via an aggressive sales effort
- ‘took the hit’ and dumped obsolete inventory
- no more special ‘one off’ pet customer deals‘; created and enforced new sales order rules to restrict the buildup of excess inventory
- rationalized the entire product line: dropped outmoded products and accelerated the development of new products to meet market needs. They innovated.
- created a centralized customer service organization run with a consistent set of product return/replacement policies
- installed a new generation of information systems to cover sales force automation, order entry and manufacturing controls
- improved the design and flow of older warehouses to improve productivity, material flow and process consistency across all locations
- emphasized quality and changed the culture: educated the employees’ thinking about new techniques for material handling/damage, detailed manufacturing processes
- introduced new machinery to cut waste and reduce scrap costs
- overhauled product engineering to tighten up bills of material by using more common parts and subassemblies
- rationalized the supplier base. Less became more
Within a year BuildingCo’s cash position improved dramatically. The company was able to acquire a similar business in a different geographical region (with the enthusiastic backing of the investor groups).
What successful techniques have you used in your company to improve the overall cash flow?