Even though your accounting system probably doesn't provide all the tools you'd like for managing cash, you can extract enough information if you work at it. At the very least, I recommend that each week you forecast cash flows for each of the next four to six weeks. Doing so is much like using weak headlights on a dark mountain road. Neither the headlights nor the forecast provides much warning of disaster ahead, but any warning is far better than none at all.
Of course, as Wickes does, you should also track actual cash flows weekly. Comparing actual cash collections and spending with your weekly forecast should help you improve future forecasts. And keeping a record of past cash flows may highlight trends that would not be apparent otherwise.
No matter how you monitor your cash flows, however, don't deceive yourself the way that many companies do with respect to accounts payable. When cash is tight, many companies extend their payables. Doing so often gives a false -- and temporary -- impression that they're generating positive cash flows. To produce a more accurate picture, subtract from your calculation of operating cash flows the increase in overdue payables your firm has experienced during the period. The resulting figure is what your operating cash flows would have been if you had had the cash or bank credit needed to pay your bills when they were due.
Inventories
Wickes's inventories total $1 billion. Though yours are less, they probably represent 25% to 50% of your total company assets and so are well worth monitoring closely.
Unfortunately, many accounting systems allow you only to calculate the inventory balance monthly. (Even at Wickes, divisions must estimate inventory each week. The estimate is a careful one, however; managers are expected to be within 5% of the actual figure.) This lack of precise data makes it difficult for most companies to track the weekly inventory balance.
As an alternative, you might try to monitor inventory purchases, a number that will reveal much about the size of your inventory. Each month, you purchase enough goods to replace what you ship, plus or minus any planned change in your total inventories. Therefore, at the beginning of the month you should be able to estimate the amount of inventory that you will purchase during the month. Dividing this figure by the number of weeks in a month will give you the approximate amount of inventory that vendors will ship and bill weekly. If purchased goods arrive as expected each week, but shipments fall off, your inventory should grow proportionately. If this dangerous trend continues for several weeks, you have enough information to act on your inventory problem, even though you may not know your exact inventory balance.
Working capital
As you know, working capital is equal to current assets minus current liabilities. Many lenders use this number and the current ratio (current assets divided by current liabilities) to indicate a company's ability to pay its obligations when due. Presumably, if a company's current assets are two or three times its current liabilities, its creditors are relatively safe in the near term.
There are many exceptions to this rule, however. Several years ago, for example, I responded to a projected cash-flow crunch by slashing inventories. Over several months I cut our inventory in half while our shipments increased. But cutting inventory also cut our current ratio to the point at which we were nearly in violation of a loan agreement. I never could make our banker understand that we became a healthier company by owning less inventory rather than more.
Whatever the merits of the discussion, many loan agreements limit a company's current ratio. This is often enough reason, therefore, to monitor that ratio during the month. This gives you the time to fix problems, if you can, before they hit your month-end statements and explode on your banker's desk.
Other measures
Any fact that's crucial to your business is a candidate for monitoring on a daily or weekly basis. Some examples:
* Companies often hire and spend based on projected sales rather than actual sales, generating losses rather than profits. With these companies, I like to track the total number of employees each week and graph weekly sales per employee.
* Tracking measures of quality can reveal much, both about the quality of your product and about the time employees waste on poor-quality product. Some suggested measures: number and dollar amount of credits issued to customers for returned goods, number and dollar amounts of credits issued by vendors for goods you returned to them, dollars spent on scrap, labor hours spent on reworks, dollar value of rejected goods awaiting disposition, and so forth.
* Most companies have to do something to generate sales. They have to meet with prospects, mail catalogs, sign up dealers, submit bids, and so on. Often, each such action will generate a reliable volume of sales. Therefore, in addition to monitoring the results of these actions -- the sales -- I try to monitor the number of selling actions themselves, when possible. I also calculate the effectiveness of each selling action -- the dollars ordered per letter mailed, say, or the number of sales calls per order. By doing so, I can quickly tell whether a rise or fall in sales has been caused by a change in the number of selling actions, or by a change in the effectiveness of each selling action.
