Maximizing Cash Flow

“The 5 systems we have used to maximize cash flow production at our HoldCo ”

Before we begin, two important points:

1. In my experience there is no silver bullet.  Rather, a combination of the strategies listed below should help when looking to maximize cash flow.

2. We run a delegated management system.  These are the tools we use with our CEOs to ensure a certain behavior and maximize cash flow.

1. Education – You will be surprised how few SMBs and their CEOs use a monthly cash flow report.  Those who occasionally use them rarely understand exactly what the report is illustrating.  This is not to disparage SMBs or their founders.  It is simply not something they have found necessary to operate all these years.  Educating your team on what a cash flow report is, how it is prepared, and the purpose it serves, is step 1 in maximizing cash flow production.

1. Identify Leakage – The goal is to convert 100% of income into operating cash flow.  That generally does not occur, there is leakage.  Where does it go?  The 3 most common culprits are:

1. Inventory

2. Receivables

3. Payables

Study your cash flow report and balance sheet.  Identify where your leakage is occurring so that you can focus on it with the CEO.

1. Implement Processes – Since most cash gets stuck in receivables and inventory you need to work on the processes of these two specific areas.  Who are you giving credit to and under what terms?  What are you purchasing, how long does it take to arrive, and how fast is it selling?  These are the questions to be asked and the processes you need to improve if you want to maximize cash flow.

1. Incentivize – We pay our CEO bonuses based on how much cash they distribute to the HoldCo.  We do not pay it based on a sales number, a profit number, or EBITDA.  It is paid on the cash that enters our HoldCo bank account.  When the CEO wants to buy some more inventory for future growth or extend credit terms to hit a sale, he will think twice about his decision knowing it will hit him in the pocket if it does not convert to cash this period.

1. Guardrails – This is the final system we have used.  We only use it when numbers 1-4 are not working.  We limit the amount of credit the company can give and/or how much inventory can be purchased based on the previous month's sales.  In essence, we are simply replacing inventory sold and invoices collected.  This will put a break on growth.  It will also guarantee cash production.  It is not a long-term solution I recommend and having to use it is not a good sign for the current CEO as it means they are just not understanding the importance of cash flow production.

Bonus point if you made it this far:

Notice I speak about Operating Cash flow, rather than Free Cash Flow.  FCF is simply OCF minus all the investments made in the company (think CAPEX).  We control these decisions at the HoldCo level.  Any major improvement or investment passes through us.  If your CEO or you are making those major CAPEX decisions, then you need to factor those in.  A dollar invested today is one less in your pocket, make sure it is going to provide an attractive future return before investing it.