Discover More Cash in Your Financial Statements

Looking For Cash in All the Wrong Places

Whenever a company needs working capital, turning to outside sources seems to be the first thing they do. But looking to the outside is more time consuming and expensive than finding the necessary capital within the company.

An analysis of the financial statements is always the place to start. The first thing to remember is that financial statements are really just a reflection of how well the company operates.

Monthly statements tell the story of how well the company was operated in the previous month. And so on for the quarter and year. A general feeling is: “We run the company the best we can and the results are the results.” Not true!

There are many things that you can learn about your company from a financial statement that will help you make short- and long-term improvements to both improve your profitability and working capital position without borrowing more money or selling equity.

In fact, in the eleven years that Revitalization Partners has been doing restructurings, we have never seen a company that could not produce additional working capital and profit from within its operations.

What Does a Typical P&L Statement Look Like?

  • Let’s start with the profit and loss statement. A typical, but simplistic P&L statement looks like this:
  • Sales (The revenue brought in for delivering our goods or services)
  • Cost of Goods Sold (Minus the direct cost of providing those costs and services
  • Gross Margin (The amount left over to operate the company and pay things like debt and taxes)
  • Expenses (Minus the amount it cost to operate the company other than the direct cost of the product or service)
  • Operating Profit (What remains to pay the non-operating costs and financing costs)
  • Non-Operating Expenses (Minus items such as interest, depreciation, amortization)
  • Net Profit (What’s left for owners and shareholders and to actually repay debt)

There Are a Number of Questions to Ask
As you look at each of these categories, there are a number of questions that have to be asked. We’ll assume that you are doing everything you know how to increase sales.

Even if sales are static, can your market tolerate a small price increase? Can you lower direct costs through changing suppliers, negotiating better pricing, getting bigger discounts? If you don’t believe it can be done, just talk with Boeing suppliers. We see it done, by companies large and small, in every industry.

Can you reduce expenses? Ah, I knew it, you’re thinking, “You just want me to cut my people!” Maybe, or maybe just make some changes. Are you really getting the performance you need from every job in the company? Do you have excess people, maybe because they’re family or close to family? Or because they’ve been with you forever? Maybe you’re just afraid to tell people bad news.

We took over a company that had come upon hard times and could not make the payments that were due to the bank. And yet, in this age of increasing health costs, the CEO insisted on paying 100% of the health insurance costs for all employees and their families. For over 60 employees! In a failing company!

When we explained that we either needed to reduce health care costs or reduce the size of the company, it was easy to arrive at a fair sharing of the costs.

Is Inventory Really A Good Thing?

Let’s look at an item that impacts both your balance sheet and profitability: inventory. Inventory, you say, is a good thing. After all, it’s an asset, I can borrow against it, and when I sell it, I make money. Maybe!

Consider a new way of thinking that says, “Inventory is evil.”  We know that’s an exaggeration, but consider it from this point of view. Generally, you can only borrow about 50% of the cost of your current inventory, which is not obsolete or degraded in some way.

The remaining 50% of the value is capital that comes out of your cash, not from a bank loan. In the case of old or obsolete inventory, 100% of it is cash not available to be used by the company. If inventory comes in, is turned into product and sold quickly, thus creating a receivable, that’s an inventory turn and an efficiently-run business.
But what if it’s not?  We worked with a small manufacturing company client that turned their inventory once per year. And the CFO of the company said: “In our industry, that may be right.” Really?

Example: Boeing Turns Their Inventory 

For a small company that makes relatively simple items? Let’s look at that thinking: One of the most complicated things in the world to make is an airplane. Yet Boeing turns their inventory 1.71 times. Intel, which makes the world’s most complex computer chips, turns their inventory slightly over 5 times. Ford Motor Company turns their inventory 16.25 times.

We had an assignment to improve the performance of the largest solar distributor in North America. They had lost over $22 million in the preceding year. Although inventory turns were satisfactory, the prices of solar panels were dropping so fast that even having them in inventory for 30 days meant taking a write down on the value of the inventory on the balance sheet. And that write down was reflected directly in the P&L statement on a monthly basis.

What Did We Do?

Stopped buying solar panels. And told the manufacturers that we wanted them to consign the inventory to us, and we would pay for it at the then current price when they were sold. Although there was great resistance at first, once the suppliers realized we were serious about cutting the losses on inventory and would search until we found vendors that would work with us, they all agreed. Of the previous loss, over half was reduced by elimination of inventory write downs.

There are a number of ways to get the funding to stabilize, improve and grow your company. And many of them are completely under your control. Having an understanding of your financial statements (and being willing to make and explain changes being made that will lead to improvement) ensures both a good relationship with your financial partners and the need for less outside capital.