Aggressive gathering of cash is almost always the first action when a company is in trouble. Less careful watching of cash typically got the company in trouble in the first place.
Even when not in trouble, initiate a crash cash Priority. Cash is almost always under-optimized. Squeezing every excess dollar out of the organization is the easiest source of funds you’ll ever find. Obviously cash is always necessary and useful, and significant results from gathering it internally are usually not that difficult to achieve.
You can attack plenty of areas: excess inventories (sell off obsolete inventories and take the reporting profit hit but free the cash), unmanaged accounts payable processes (everyone pays “in the nick”, so you should too), soft collection policies (don’t think that your customers will like you better if you don’t push hard to collect), and capital expenditures (even if already authorized and some funds spent, tightly scrutinize the justification in today’s conditions). Attacking these four categories alone, you may accumulate “free” million$s. Establish this as a top priority, put someone in charge (as mentioned in previous blogs, this might not necessarily be the CFO--this is a good time for a young, smart person to walk through the entire flow of procedures), and obtain rapid results.
This initial attack with its substantial results is a one-time affair, and it should clean up most of the sloppy policies that led to whatever waste you’ve uncovered and cash you’re recovered.
Next week, part 2 on the subject of cash; the Liquid Balance Sheet, a simple but highly effective method of distinguishing between the operating profits reported via accrual accounting policies, and the realities of how the company is actually performing. Why is this important? Had this technique been used by just one of the hundreds of auditors at Enron, the company’s fraudulent reporting would have been uncovered earlier. Had this technique been used by a major LBO group on one of its earlier acquisitions it would have avoided the embarrassment of a bankruptcy. If you use this on your first assignment, you’ll sleep comfortably knowing you have put in place a fool-proof system that will either support the existing accrual accounting policies or expose them; either way you’re a winner.
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