What you should know about cash flow

By Bob Clements

When it comes to challenges in an outdoor power equipment dealership — getting and keeping cash has to rank at the top of the list. I can’t tell you how many times I’ve talked to dealers who asked the question, “How is it possible that my financials show that I have made a profit, yet I still can’t pay my bills?” I tell them all the same thing: Profit and cash are not necessarily the same thing. As a matter of fact, it is not uncommon for a dealer to be “profitable” and “broke” at the same time. As an OPE dealer, you have inventory to carry, labor costs, competition and a highly seasonal business cycle, which all adds up to a need for strong cash flow management and planning.

Warning signs

On television, there are often ads that encourage you to pay attention to the “warning signs” of potential life-threatening illnesses. I saw one the other night that told me if I was experiencing sudden numbness or weakness of the face, arm or leg; sudden confusion or trouble speaking; or sudden trouble seeing or walking — these could be signs of a stroke and I should seek immediate medical attention. Fortunately, I was not experiencing any of those signs, so I knew that at least I wasn’t suffering a stroke. But, just as your body sends you signals and warnings that an emergency is approaching, so, too, does your business. The challenge for most dealers is they don’t pay attention to what the signs are telling them.

Following are some basic signs that may indicate an impending cash-flow crisis in your dealership. Do yourself a favor by reviewing the list and checking the ones that apply to you and your business.

You don’t do a physical parts inventory on a regular basis.
Your credit line was not paid back last year.
During the past 12 months, you made late payments on a loan.
Your bank statements are not reconciled every month.
You have had fast-moving wholegoods and parts out of stock more than twice this season.
Trade-ins were carried over from last season.
Your sales have increased by more than 20 percent.
You seldom are able to take vendor discounts for early payment.
You attended vendor meetings last year without a plan on what you were going to purchase for this season.
You don’t do a weekly accounts receivable report.
You have no monthly cash budget projections.
You only have business discussions with your accountant at tax time.
You have had to take a partial payroll check this year.
You don’t spend time looking at your balance sheet and income statements each month.

So how did you do? Do you have any warning signs that might indicate you are in a cash flow crunch or have the potential to have one in the future?

Let me ask you a serious question: If the Centers for Disease Control and Prevention announced the discovery of a new virus and the first symptom of the disease was death, would you be more vigilant in doing whatever was possible to avoid the virus? Of course, we all would. From a business perspective, poor cash flow is a dangerous virus, and a high percentage of the time it brings death to the dealership it invades.

Cash flow is easy to understand. It is simply a measurement of the money that is coming in over a specific period of time — a week, month or quarter — versus the money that is being spent over that same time period. If it is consistently positive — meaning that you are bringing in more money than you are spending — then, in all probability, you will be doing fine and can meet your financial obligations. On the other hand, if it is consistently negative — you are spending more than is coming in — it’s a sign your dealership is going to eventually go out of business.

Understand your cash flow statement

When you look at the financial information you are getting either from your business management system or your accountant, you will find three distinct elements that you want to manage: the balance sheet, income statement, and cash flow statement.

The balance sheet looks at what your company owns and what it owes at a fixed point in time. Your income statement shows how much money you have made and spent over a period of time. The cash flow statement shows the movement of money between your dealership and everyone you pay over a period of time.

The cash flow statement differs from these other financial statements because it acts as a kind of checkbook that reconciles both the balance sheet and income statement. It shows whether all of that revenue on the income statement has actually been collected. I would encourage you to ask your accountant to walk you through your cash flow statement so that you understand exactly where you are at financially on at least a monthly basis.

Take control

For some people, “cash flow” means nothing more than “Do I have enough money in my checking account to pay my bills, my floor plan and make payroll?” As a dealer, you need to be realistic about how much cash your business will generate at any given point in time. If you have been in business for a fair amount of time, you know what your weekly and monthly costs are going to be based upon the time of year. You must make sure that you run your dealership in such a way that you have the cash to meet the demands of the business at that specific time.

I’ve often found that using a spreadsheet with our dealers helps them to track cash in and cash out, and gives them the ability to quickly spot potential problems so they can make adjustments before it’s too late. By looking at your expenses and projected cash at least three months in the future, you have the ability to spot a potential problem and make adjustments. It is important to make weekly updates because predictions are just that, and, as often as not, can be wrong. If you would like a copy of the cash flow spreadsheet we use with our dealers, e-mail me at bob@bobclements.com and I will send you a copy.

Learn to say “no”

Too often in business, we see something that we want and then spend money that we have not budgeted to buy it. The most important questions you can ask yourself are as follows: “Do I really need this? Will my business make more money because I have made this investment?” If the answers to both are “no,” don’t spend the money. It is easy to be sold into “needing” new computers, telephones, trucks or trailers, but not at the expense of not being able to meet your payroll or pay for things you do need.

Grow, but not too fast

All business owners want to grow their business, yet rapid, unplanned growth can be dangerous or even fatal to your dealership. It requires more inventories, more payroll costs, and more equipment. You end up growing expenses faster than you can grow your cash flow. I see it happen all the time. You have dealerships that are doing $800,000 in gross sales, making a good profit with strong cash flow, and then they decide to make the push to get past the $1-million mark, only to struggle because their expenses outgrew their cash flow. So, they go from strong positive cash flow to an increasingly negative cash flow as their sales go higher and higher. Does it mean you shouldn’t try to grow your business? Of course not — just grow it slow and planned.

Cash Conversion Cycle

As dealers start to make the decision to make a strong push for growth, I encourage them to work with their accountant to focus on their Cash Conversion Cycle (CCC).

The CCC is simply the amount of time it takes you to convert sales (wholegoods, parts and labor) back into cash. The CCC is made up of the three elements from your financial statements: Accounts Receivable outstanding in days (ARO), Accounts Payable outstanding in days (APO), and Inventory in days (IOD).

The CCC is equal to the time is takes to sell your wholegoods, parts and labor inventory and collect receivables, minus the time it takes to pay your payables. The formula is: IOD + ARO – APO = CCC.

Why is this cycle important? Because it represents the number of days your cash remains tied up to where you can’t gain access to it to make payroll and bank payments or to cover your floor plan. Remember, the lower the CCC, the healthier your dealership. Your ultimate goal would be to have your CCC as a negative, which means that you are selling your wholegoods, parts and labor inventory and collecting your receivables before you have to pay your payables.

Before you say it is impossible to do, keep in mind that Wal-Mart strives to sell its inventory before they have to pay for it. Its goal is to have a negative CCC.

Evaluate your expenses

Cutting costs is never a one-time exercise. Make it a point to be always looking for ways to get something for less, or to eliminate a cost altogether. Every year, ask your insurance agent to re-bid your insurance. I am not a big fan of changing insurance agents or companies, but they don’t have to know that. You might be surprised to find your rate go down. If it doesn’t, it didn’t cost you any time or energy to at least have your agent do what he or she is paid to do. Re-evaluate your phone costs. Do you really need all of your current phone lines? How about your Internet costs? Is there a cheaper way to get high-speed Internet service? Look at employee costs, especially overtime. Most dealers sign checks, but very few really spend the time looking at what they are signing. I would encourage each of you to take time to review each and every one of the checks you signed last month and ask yourself the question, “Could I have done something to reduce the amount of the check?”

Collect your receivables

I encourage my dealers to work on eliminating accounts receivables altogether, but I understand that in some cases it’s not possible. If you do carry accounts and if you haven’t been paid by the due date on the invoice, immediately make a phone call and find out why. It’s no fun to make those calls, but once customers realize that they can get away with paying you late without you hounding them, you will always be the last one to be paid. We want to keep our customers happy, but a customer who doesn’t pay you is not really a customer at all. Remember, we are not in business to be a bank — don’t allow your customers to use you like one.

Build a cash reserve

We all know that regardless of where you live in North America — there will be a slow season at some point. If you know it’s coming — and it is — then start setting aside money when the cash is rolling in. If you have done a cash flow projection, you already know what your needs will be in December and January, so hold your costs down and build toward those months. Having one great month — like most of you did in April — gives you a false sense of security. You never know what is going to happen in your business. I’ve had dealers need to replace computers, trucks, roofs and compressors that they had not planned on replacing. Build up your cash reserves for that rainy day that you know will show up. If it doesn’t, you’ve got a nice jump on the slow months. If it does, you have the cash to deal with it. Your goal is to have enough cash to cover two months worth of expenses. You’re not going to be able to get to that level overnight, so as Dave Ramsey would say, “Take baby steps, but build your reserves up.”

Your cash flow is truly the lifeblood of your dealership. Watch it, protect it, nurture it, manage it, and success will be yours!

 Bob Clements is the president of Bob Clements International, Inc., a consulting firm that specializes in the development of high-performance dealerships. His organization works hands on with dealerships throughout North America, helping them attain the personal freedom and financial wealth all owners strive to achieve. For more information, contact Bob Clements at (800) 480-0737 or bob@bobclements.com or visit his Web site at www.bobclements.com.

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