Let’s talk about how to quickly produce more cash when you need it as well as more long-range strategies to improve your cash position on a more permanent basis.
1 – Reduce inventory levels. Within 30 days time, most wholesalers and retailers can make a one-third reduction in inventory without negatively impacting sales volume. Using even small company typical $15,000,000 annual sales revenue, the reduction usually means over $100,000 of cash produced during this 30 day period.
For fuel inventory, watch price trends. You don’t want to be cutting back tank levels when prices are rising. For specific details on how to get your inventory “right-sized”, please see the other resources at www.PetroAnswers.com.
2 – Negotiate longer supply terms. An extra two days of credit from major suppliers translates to $80,000 in immediate cash relief for the typical marketer. Never assume that you must accept any supplier’s typical terms. Most marketers wheel and deal with major suppliers, but don’t go advertising that fact at trade conventions!
3 – Dedicate one office staff member to accounts receivable collection. Here at Meridian, we worked with a $30,000,000 marketer who collected over $400,000 in cash within 30 days just by dedicating one office person to receivables management and collection. Your results may not be as dramatic, but we find the average marketer can bring in $120,000 within 30 days by dedicating one full-time employee to the effort.
We’ve posted numerous articles to help you with receivables collection. Please use the search feature if you’d like more information on receivables management.
4 – Sell off non-producing assets. Take a hard look at your equipment, vehicles and sites. When it comes to equipment, consider selling off anything sitting in your warehouse or yard that hasn’t been used for one year. If it hasn’t been used for 12 months, your chances of needing that equipment in the next few years are small.
Next, take a critical look at your vehicle usage. Do any fleet vehicles get very little use? If so, consider selling the least-used vehicle in the fleet if it will produce meaningful cash.
Do you provide automobiles for executives or sales persons? If so, consider the economics of switching to a mileage reimbursement program.
Do you own any vacant land? Unless that land is appreciating and you have a good future use for it, consider converting that land to cash.
If you studied each site you own – bulk plant, cardlock, store, etc. – could you honestly say that each one is providing an acceptable return on assets? If the answer is no, it may be time to consolidate your operations, getting rid of the ones that under-perform.
If you actively pursued each of these four quick fixes, you could easily produce $500,000 or more in less than 30 days. Your objective, however, is to create permanent positive cash flow in your business. The long-term strategies may be tougher to implement and take more time to produce results, but will have a more lasting effect.
For permanent positive cash flow, the secret is to create total efficiency throughout your entire company. Every day your company throws away cash. It doesn’t bother you because it is hidden from sight. At Meridian seminars, Betsi has fun with attendees by asking one or two audience volunteers to throw away the biggest bill they have in their wallet. You should see the pain on their faces as they part with a $20 or $100 bill!
In our petroleum businesses, however, we throw away money in the thousands and tens of thousands of dollars. And the worst problem is that we don’t experience any pain when we throw away this cash. We don’t know it’s going out the door.
Take for example employee turnover. When you consider advertising, interview time and training, it is likely that each replacement employee costs you upward of $1,000. Now ask yourself, how many people did we replace last year? Multiply the number of people by $1,000, and you know how much money you threw away due to your company’s inefficiency. If you have a large store chain, it’s likely your company threw away over $100,000.
Let’s take another example of delivery schedules. If you delivered to your customer 52 times per year last year, but based upon that customer’s product usage you should have delivered 30 times, you threw away cash. How much cash? Well, let’s assume a typical delivery costs you $50 and you have 500 delivery customers. Your present delivery schedule means you threw away $25,000 last year.
If you were in a Meridian seminar and I asked you to throw $25,000 into a wastebasket, you’d think I was crazy. So isn’t your company really the crazy one not to analyze and optimize customer delivery?
Notice there is no quick fix to either of these large dollar wasters. In each of these two examples, you must establish new systems and procedures to eliminate the waste. It’s much easier to pretend the waste doesn’t exist and just keep on doing exactly what you’ve been doing.
Which brings us to our favorite definition of insanity:
“Insanity is doing the same thing over and over again while expecting a different result.”
If you are dissatisfied with your present company cash flow, you must change your procedures and systems. If you keep hiring and training the way you’ve always done it, you will keep getting the same turnover you’ve always had. If you keep delivering to your customers once per week because it’s easier for your routing system, you’ll always forfeit the $25,000 you would have had by going to less frequent deliveries.
So, use the four quick fixes to immediately boost your cash. For more long term results, however, begin the harder work on your system efficiency.