* Cash concentration -- the efficiency with which Via Systems' earnings, once collected, were drawn into a network of lock boxes, bank accounts, and so forth.
* Disbursements -- the way that bill payments were timed.
* Forecasting -- the accuracy and usefulness of Brandon's projections about when cash would enter and leave the business.
* Inventory -- how much cash was tied up in raw materials and unsold goods.
* Bank relations -- everything from how well money flows between different bank accounts to the company's lines of credit and existing loans.
Naturally, this analysis and the risks inherent in each of the six phases differ according to the company and industry. Via Systems, for example, did an excellent job of collecting accounts receivable and had little cash tied up in excessive inventories. But on a micro level, Parish identified plenty of ways to trim the company's cash-flow machine. "He forced me to analyze costs in terms of whether they were justified by sales," Brandon recalls. "The result was I stopped attending some conferences and decided to stop spending $15,000 to produce four-color advertising brochures when one-page black-and-white would do." Parish's analysis confirmed Brandon's apprehensions about one glaring weakness of Via Systems. The company had no lines of bank credit and thus no outside protection against months when cash flow might turn negative, a big risk for a company considering introducing costly new products.
For other companies, cash-flow glitches might turn up elsewhere. "To a leasing company that expected large quarterly receipts, for example, even a day or two delay in getting money concentrated in bank networks could be costly," emphasizes Parish. "Or a manufacturer who was keeping inventories unnecessarily high might be tying up cash that could be used to pay bills or earn interest in bank accounts." A typical problem for all companies is mistiming their bill payments. "Some companies pay too early and wind up forgoing the interest they could have earned on their cash," says Parish. "Others pay too late and either wind up with late penalties or being forced to buy on a COD basis, which really kills them."
Once Parish had worked out a bare-bones cash-flow model for Via Systems appropriate for its present size, the rest was easy. For Brandon, with more than 20 years in the computer industry, and Parish, with Grant Thornton's technical support, it was a relatively straightforward matter to project the way each new product would add monthly overhead costs and, conservatively speaking, affect sales. "We worked up a set of projections that showed us going from a positive net cash flow of over $8,000 in February of 1988 to negative cash flow totaling about $45,000 in March and April, when we started bringing new products to market," says Brandon. He smiles. "When I went negative for those two months it didn't worry me, because I had faith in our long-term assumptions." Sure enough, the company's net cash flow went back into the black by May to a healthy $5,500 and has steadily increased from there.
Think of Brandon as a cash-flow convert. "Before I did the analysis I didn't know which steps I could take. Now, I've introduced four new products to the market and we've done beautifully -- the last one exceeded our projections by a factor of three." With further plans for diversification, Brandon and Parish plan to sit down and rework the company's cash-flow projections for the next 18 months. "My cash-flow plan is a living, breathing document," laughs Brandon. "I find that these days when I feel anxious it's usually because I've fallen behind in looking at my numbers."
GOING WITH THE FLOW
What to do to get reliable projections
Here are some suggestions to make your cash-flow analysis as painless -- and useful -- as possible:
* Set up appropriate records. Keep detailed financial records that make sense for your business and not just for the Internal Revenue Service. After going through the initial process of analysis with Via Systems Inc.'s accountant, Paul Parish -- and hunting down all the financial details about the company's cash flow that he simply did not know -- president John Brandon decided to switch the company's general accounts to a system that breaks down expenses, receipts, and other categories into real-life specifics.
* Look for trends. Computerize those records and assign someone, either inside or outside the company, to do a quarterly search for disturbing patterns like bank delays or slow collectibles. Once records are computerized, it's also a simple task to evaluate the accuracy of cash-flow projections on a month-by-month basis.
* Plan regular analyses. Schedule cash-flow analysis for every 12 to 18 months -- then update them every time the company contemplates a major change. If your company, like Brandon's, is growing rapidly, you'll probably find that your short-term plan is much more useful than your three- to five-year model, but do both. "Just projecting numbers sometimes helps CEOs clarify ideas or goals," emphasizes Parish.
* Go with the flow. The process really is easier after the first go-around. "We've already done the records, forcing me to justify my ideas," says Brandon. "Now, we just update the numbers as the company and my goals keep growing."
