"We were fat, dumb, and happy and just didn't care until we woke up one morning in the mid-1980s with a negative net worth of $400,000 on sales of $4 million," recalls Neil Smith, formerly of Western Windshields, a Portland, Oreg., auto-glass distributor he co-owned until May 1992, when it was bought by a Fortune 100 company.

Smith, then CEO and owner of 50% of the company, decided its survival depended on upgrading its internal financial systems and controls. "My partner and I ultimately turned the company profitable on about $15 million in sales and sold it for an attractive price," he says. Their complete overhaul strategy focused on --

Cash flow. "We needed to connect management decisions with cash-flow realities, but we hadn't understood those realities in the past. So my controller and I started monitoring cash flow on a daily basis," he explains. Special emphasis was placed on the company's daily credit position, collection patterns, and purchasing trends, which were then compared with recent sales figures. When cash outflow exceeded the company's projected inflow, expenditures were cut, invoice payments were delayed, and collection efforts were increased, all with the overall goal of never spending more than the company took in.

Inventory. "As a distributor we had two basic assets: our inventory and our receivables," Smith explains. "Once we started analyzing the effectiveness of our existing financial controls, we realized our software hadn't been capable of tracking our inventory trends as accurately and as swiftly as we needed it to." By upgrading his overall software system, Smith was able to improve the quality of all his financial reports, an unexpected benefit.

An outside board. "We needed someone from outside our management team who could regularly challenge our financial systems and assumptions," Smith recalls. "So we staggered our board of directors to favor outside representation and brought in a financial person, among others." That gave him the input of a financial consultant at a small fraction of the cost.

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