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Five Keys To Good Cash Management

These steps are necessary to the bottom line in today's new-look textiles industry.

By J. Tol Broome Jr.

dollarsigns_947C ash flow. It’s the name of the game in any textile business. That is, in any textile venture that wants to stay in business. Yet, many textile owners get so caught up in the day-to-day operations of the business that they fail to devote enough time to “big picture” cash flow management. Cash flow pressures have been greatly heightened in the industry by the offshore manufacturing boom, increased competition and the capital intensive rush to automation.

Alice Magos is the advice columnist for America Online’s Business Owner’s Toolkit. In her “ Ask Alice” column, she is often queried about cash management concerns by textile business owners. Magos contends that a focus on enhancing cash flow can keep a textile company up and running, even if the red ink has been flowing.

“Cash flow is king,” advises Magos. “Even if profitability has eluded you, survival can be attained if cash flow is maintained. Planning around cash flow is essential.”

Effective Cash Management

In the good old days in the textile industry (pre-NAFTA), one always effective strategy was to increase sales. A well-run company could closely manage its gross profit margin and operating expenses. Consequently, more sales meant more profits. This credo does not always hold true today, however. In fact, many textile firms have found the opposite to be true as higher sales have led to bigger losses.

As we enter the new millennium in the textile industry, there is a new cash management game. In order to play, you often must find ways to enhance cash flow without increasing sales. Magos refers to this practice as “bootstrapping.”

“Bootstrapping is the first line of defense for a textile business experiencing cash flow problems,” explains Magos. “Bootstrapping is a buzzword that basically means generating needed funds by deftly managing your cash inflows and outflows. Improving cash flow should be a daily task, like housekeeping. Monitoring, forecasting and analyzing cash flows is essential to liquidity and profitability, even for the Fortune 500 crowd.”

Following are five practical suggestions to follow that will provide immediate enhancement to your bank balance.

Accounts Receivable Collection

Unless factoring is used, the typical textile firm has a significant portion of its balance sheets tied up in receivables. And slow accounts receivable collection can cause a major drain on cash flow.

For instance, a textile company with $12 million in annual sales generates about $1,000,000 per month in gross revenue. If customers are paying 30 days from the date of invoice, then the company has accounts receivable of about $1,000,000 (30/360 x $12 million) at any given time. However, if customers generally are 10 days behind in payments to the textile company, accounts receivable would be approximately $1,333,333 (40/360 x $12 million). This represents a direct drain on cash flow of $333,333.
Brad Moser is a partner with Gilliam, Coble & Moser LLP, Burlington, N.C. His CPA firm works with more than 25 textile-related companies in the Piedmont region of the state. Moser says that accounts receivable collection is a key to successful cash flow management for any textile business.

As Moser points out, good accounts receivable management is a two-step process. “All invoices should be sent on a timely basis,” he says. “Many small business owners lose cash flow by delaying the sending of invoices. And, of course, it is vitally important to follow up with a good receivables collection program.”

If you already have a good accounts receivable collection program in place and are still having major cash flow problems, factoring might be your next step. Many textile business owners resist factoring due to the perceived high costs and a fear that their customers will resist. And while factoring fees and interest rates are considerably higher than those paid for conventional bank asset-based lending lines of credit, the cash flow improvement can be dramatic for a textile concern.

Some other benefits of factoring include:
• elimination of a credit department could reduce the number of employees, as well as charge-offs from uncollectible receivables;
• may allow your company to take discounts from suppliers;
• credit information available on customers in a broader geographic range;
• faster growth; and
• factoring does not count as debt on your balance sheet and can free up availability for additional bank borrowings for capital expansion and other needs.

Improve Profit Margins

money_946No matter how you slice it, there are three ways to improve your gross profit margins (calculated by subtracting your direct costs from your total sales revenues) — raise prices, reduce direct costs and change your product mix. Raising prices can cause a catch-22 in that you may lose sales. But if you take a sensible approach to price increases (i.e. pass along price increases from your suppliers) and stay in line with the competition, you should be able to periodically raise the prices on your different products and services.

There are other ways to improve gross profit margins. Job cost every potential order to ensure its profitability. If you can’t make money on an order, don’t take it or consider outsourcing it to someone who can produce the goods profitably.

Check your control system for ordering inventory and supplies. It is recommended to centralize this process to ensure efficiency. Every textile company should have one person who is dedicated to ordering raw materials and supplies for the plant and office. Along the same lines, it is very important to return damaged materials immediately.

Change your “product mix.” Push the more profitable items. For instance, if you have just installed a new wet processing technology that enhances profitability, shift your marketing efforts to this area so your existing and potential customers will consider you as a source.

Consider adding ancillary products. If your company manufactures women’s hosiery, and you are already selling to one or more super retailers, find a source for another related product (i.e. another line of women’s hosiery or a line of men’s hosiery) to sell. With the growing industry trend toward outsourcing, you can leverage your marketing efforts by finding another source for certain items and reselling them to your existing customers.

Take Advantage Of Terms

While it is certainly important to pay suppliers in a timely manner, it is generally not a good idea to pay early. Yet many textile owners pride themselves in paying suppliers 10 days before bills are due.

If you purchase anything on terms or on account, this is one area that procrastination pays. Wait until the day a bill or invoice is due to pay it. Your cash flow will be enhanced, and your valued supplier relationships will not be harmed because you will still be paying on time.

“Take advantage of the terms your vendors will allow,” Moser said. “Don’t abuse the opportunity to delay payment, but you also don’t want to pay as soon as you receive the invoice.”& amp; amp; amp; amp; amp; amp; lt; /font>

Controlling Operating Expenses

It is often the intangible operating expenses that are paid the least attention by textile business owners but which drain cash flow the most. Areas such as personnel expenses, utilities, insurance and telephone service can substantially deplete cash flow without the owner even realizing it is happening. Long-distance telephone service can be shopped. There have been some great long-distance telephone service wars going on over the past few years.

Utilities expenses can be lowered by minimizing the use of electricity and by adjusting the plant thermostat upward or downward a few degrees during the summer and winter months. In fact, most utility companies offer a free on-site consultation to help you reduce your energy usage.

And there are several different ways to save on insurance costs. Even if you don’t own your own building, you still have to purchase insurance for your equipment, inventory and other contents, as well as for workman’s compensation and life, health and disability insurance. And whether or not you provide these benefits for your employees, you must maintain them on yourself. Different insurance companies have varied rates for the myriad of insurance services offered, and a little shopping might go a long way in enhancing your bottom line.

Personnel expenses can often be the hardest to control and can really sap cash flow; however, if you will keep a close eye on employee downtime and minimize overtime, you will see positive results in the bank balance.

“Payroll costs are big for any textile business,” Moser said. “Take a look at peak times and make sure they are covered. But during downtimes, try to cut back on the number of employees on hand. And a close eye should always be kept on overtime.”

In fact, Moser said that a close eye should be kept on all operating expenses. He suggests on an at least annual basis, taking a close look at the income statement and picking out the five biggest expense items.

“Figure out which of the five biggest expense items can be cut back during the coming year,” advises Moser. “In fact, you should periodically review the entire income statement and ask yourself if some of the expenses are needed at all. For instance, if you are having your facility cleaned weekly, you might be able to save a lot of money by cutting back to every other week. The same could be true for, say, waste removal.”

Go See Your Banker

Nearly all textile business owners use outside financing to help start or expand the business. But many don’t realize that banks are sometimes flexible on repayment terms. If you are looking for ways to enhance cash flow, more favorable loan terms might just be the ticket.

For instance, on a $600,000, four-year loan at 9 percent, the monthly payment would be about $15,000. By simply extending that same loan to a five-year payback, the monthly obligation drops to $12,500. This translates to a monthly savings of $2,500 and annual cash flow enhancement of $30,000.

A second key cash flow enhancement tool offered by your bank is cash management services. If your textile company isn’t currently set up on a cash management program with a bank, ask your banker to make a cash management presentation.

Tom Bennett is manager of the Treasury Management Services Group for First Charter, Concord, N.C. During his 14 years in banking, Bennett has worked with dozens of textile companies and says there are a myriad of excellent cash management services now available to textile concerns that will enhance cash flow.

“There is much more available to smaller textile companies than there was even five years ago,” Bennett said. “Most textile companies with which I have worked use factoring or asset-based lending to finance accounts receivable. Bank cash management services are a critical component in concert with this type of borrowing to maximize cash flow for the company.”

As an example, Bennett sites the ability of a bank to analyze “mail float” for a customer. He recently called on a textile company in a rural location. Some of their checks were taking as long as 10 days to arrive at the company’s doorstep. Then because of the rural location, the bookkeeper would sometimes wait a couple of days before making a trip to the bank to deposit the funds.

“We advised this client to set up a lockbox in Charlotte, a major city that was nearby,” Bennett said. “The cash flow improvement was significant because all funds were becoming available several days sooner.”

According to Bennett, some of the cash management services offered by banks include:

• On-Line Balance Reporting And Funds Transfer — Allows you to access your business accounts with an on-site PC terminal and modem. Says Bennett: “Good, timely cash management information allows the textile company to make wiser, quicker decisions.”

• E-Commerce — Bennett says more and more companies are using business-to-business e-commerce. Cash flow is enhanced since the textile company agrees with the customer when the invoice will be paid electronically, thereby eliminating late payments.

• Account Reconciliation — A listing of your checks paid in order of serial number or date that is available on paper, tape, diskette, CD or by data transmission via the on-site PC terminal and modem referenced above.

• Automated Clearing House (ACH) Services — Facilitates electronic funds transfers to replace paper transactions and wire transfers. ACH can also be used to initiate debits and credits electronically.

• Automatic Investment Plans — Also known as “sweep accounts,” these plans automatically sweep collected DDA (demand deposit account) funds that exceed your target balance to eliminate service charges into overnight investments such as Master Notes and Repurchase Agreements. These generally offer more attractive yields than those offered by money market accounts and CD’s.

• Cash Concentration — This service moves funds from your company’s accounts at other financial institutions to your primary account. This service is ideal for multiple location textile businesses that do not have access to the same bank in each location.

• Controlled Disbursement — This service eliminates idle balances on deposit in anticipation of checks clearing. It improves cash forecasting and earnings potential and provides absolute control over disbursements.

• Inclearing Report — Bennett singles this service out as one of the most beneficial controlled disbursement services offered by banks. The Inclearing Report is provided by the bank via the Federal Reserve and includes all checks that will clear that night.

• Lockbox — With a lockbox, the textile company’s customers mail payments to an exclusive Post Office Box. The bank processes the mail, deposits checks and sends remittance documents and copies of the checks to the textile company. The deposit amount is reported daily to the firm. According to Bennett, a lockbox is usually required in factoring and asset-based lending arrangements.

• Imaged Lockbox — This service allows the textile company to go on-line and view an image of every item that goes through its account each day. Bennett sites a hosiery company that uses this service, even though the annual fees involved were $8,000 higher than for the same information availability on paper.

• Letters Of Credit — If you are dealing with a supplier who requires a deposit for goods shipped, a letter of credit could be an effective cash management tool. Most suppliers will readily accept bank letters of credit (the bank substitutes its credit rating for yours and charges a fee for the service) in lieu of cash deposits on orders taken.

With the challenging trends facing the textile industry, an effective cash management strategy is critical to the company’s ability to be a survivor. It is hoped that some of these suggestions will aid you in keeping the cash flowing into rather than out of your textile business.

What Should You Do With Your Excess Cash Flow?

If you are generating excess cash flow in your textile concern, the next key question is “what should you do with it?” The decisions you make can be critical in this area. Ken Anderson, who has more than 15 years of experience with The Principal Financial Group, advises that effective cash flow management starts with the objective of the cash.

“The first thing I ask the textile business owner is ‘what will the cash be used for,’” explains Anderson. “It is important to know if the excess cash will be used to pay taxes, fund expansion or buy equipment.”

“The key is to focus on whether the excess cash is short term, mid-range or long term,” continues Anderson. “This directly affects the various investment options for the company. And for any term, I perform a risk assessment to find out the risk tolerance of the business owner. Any investment strategy must be in line with the risk tolerance level of the business owner.”

If the textile company is going to need access to the cash within one to three years.

Anderson says that is a short-term need. Anticipation that the cash will be needed within three to five years represents a mid-range need. A long-term investment strategy should be employed if the business will not need the excess cash for at least five years.

“For short term excess cash, I recommend safe investments,” says Anderson. “In a case like this, you won’t have time to regain the funds if they are lost in a higher risk investment.” Anderson recommends three basic options for short-term excess cash flow — government secured treasury bonds, bank certificates of deposit and high-grade commercial bonds.

“With a mid-range strategy, you can be a little more aggressive,” advises Anderson. “If the money isn’t needed for three to five years, some can be put in equities. But I recommend only blue chips with a high dividend payout level. Even with a mid-range strategy, however, only a portion of the funds should be put in equities.”

With a long-term investment strategy, Anderson recommends a multi-asset, multi-manager, multi-style, multi-market asset allocation approach. This enables the textile business owner to “ hedge” investments over a long term by balancing a standard deviated risk level with acceptable returns. Anderson sites the Frank Russell Investment Management Company, Tacoma, Wash., as the top company in this field.

In situations in which sustained excess cash flow levels are anticipated, Anderson also recommends that the textile business owner consider executive compensation and profit sharing plans to make sure the cash flow remains strong.

“Sharing excess cash flow with employees and key executives is a form of investment in that you are investing in your people,” says Anderson. “It increases employee morale, which typically leads to better operating efficiency and lower turnover. Your people will work harder for you if they know you are looking out for them.”

Anderson sites incentive pay, employee bonuses and qualified retirement plans such as 401(K) and pension plans as excellent benefits to offer to keep your good employees from leaving. He also says that most businesses have a few key senior-level employees who are vital to the success of the operation and who are primarily responsible for the excess cash flow of a business. Explains Anderson: “Ask yourself the question, ‘is there anyone in the organization whose loss would cripple my operation?’ If there are one or two or more, put in a plan to incent them to stay.”

For senior-level employees, Anderson says that non-qualified retirement plans are the most effective and efficient tools to keep them on board. In fact, non-qualified retirement plans are often referred to as executive compensation plans, because they are usually offered only to the owner or the senior management team of a business. “With a non-qualified plan, you pick and choose the benefits and who will have something special done for them,” says Anderson.

Anderson says there are a number of different non-qualified plans that can be undertaken. However, he sights three different plans that are typical for small businesses. Below is a quick overview of these three options. An insurance agent can explain them to you in far more detail.

According to Anderson, an executive bonus plan is common for a new or emerging small business. The business pays a tax-deductible bonus which is used to pay life insurance premiums, deducts the bonus as a normal business expense and reports it as “other compensation” on the employee’s W-2. The employee owns the policy and reports the bonus as taxable income.

It is advantageous for the key employee in several ways. An executive bonus plan can be custom-fit to meet the employee’s needs and objectives, it provides insurance protection for a spouse and/or family in the event of death, it provides potential cash-value growth that may supplement retirement income and taxes are paid only on the premium amount.

As the owner of the policy, the key employee holds the rights to all cash dividends, policy loans and withdrawals. In short, an executive bonus provides an easy way to provide a benefit other than cash for a small business looking to reward a few key employees or even just the owner.

Anderson says that split dollar plans are more common with maturing small businesses.

The company pays all or part of the premium for a key employee’s life insurance policy. A portion of the death benefit and policy cash values (equal to the premium paid by the employer) is assigned to the business. The employee pays a minimal income tax on the cost of the policy’s current economic benefit.

At a future date, usually triggered by the retirement of the employee, he or she uses cash values to repay the premiums the company paid. The split-dollar agreement is terminated, and the policy and its benefits belong solely to the employee.

According to Anderson, deferred compensation delays payment of a portion of a highly paid employee’s income (and taxes) until retirement when his/her income level presumably will be lower. It also provides funds in case of early retirement or disability.

Editor’s Note: J. Tol Broome Jr. is a freelance business writer and has been in banking for 17 years in commercial lending. He is currently a regional loan administrator with BB&T, Winston-Salem, N.C. Broome’s work has appeared in numerous business and trade publications.
April 2000