During these slow times, many businesses are relooking at cash and cost-saving ideas. As you can imagine in the roundtables sponsored by the Southern Building Material Association, the topic that has taken center stage is "What else can be done?" This article will focus on ten suggestions that you may not have thought of as ways to keep cash in the company and expenses down.
- Plan on what you think of as the worst-case scenario and take action now as if it had already occurred.
One of the things that most closely-held and small merchants consistently do as a group is to hold on to people too long. Recognize that in so doing you are threatening the very survival of the company and unnecessarily put at risk the jobs of all your "A" class associates.
Decide now on what your business will look like with another 10%-15% decline in sales from current levels--and what you need to do to break even. This housing downturn is now projected to last through September 2009, if not longer.
If you have multiple locations, look at the results of each to see if it will be possible to cover all of the location's variable costs and debt service. If not, consider lowering the service level to a core group of associates and shipping orders out of near-by sister locations.
Alternatively, consider mothballing the location, or selling it now instead of six months from now. In this multi-yard review, treat all costs allocated from the home office as fixed costs, not variable, as these costs will likely continue at the home office location.
- Turn or burn.
Utilize the supply chain to maximize your cash flow. Rethink the difference between special order inventory items and stocking inventory items. In these slow times, even the lead times needed for roofing products have fallen to less than a week. Do you really need to keep on hand all fast-moving colors of roofing or other special color products? Or could you discuss with your supplier their stocking level of the same product? Rely on their inventory levels and better planning, rather than stocking the item yourself. You might just be burning your cash unnecessarily with your current stocking practices.
In the area of inventory turns and cash flow, look at your inventory level in relationship to your Accounts Payable. Typical merchants usually have A/P at only about 50% of the inventory level. I have worked with merchants that stay in A/P terms while having A/P balances of 100% or more of their inventory; therefore, effectively utilizing their vendors to finance their inventory for free. Again, terms are discussed at time of purchase or before. Vendors need orders, too, and will (when leaned on), give up five to 10 days to good customers. (Take a look at Costco's financials. Admittedly, it's not a building material merchant, but it is a merchant that consistently has Accounts Payable that range from 102% to 107% of inventory .)
- Reset all inventory reorder points.
Eliminate "min-max" order points based upon what was going on last year at the same time. Reset the inventory quantity levels needed based upon the past three months rolling average and have your system recalculate the needed quantity every weekend.
- Advertise only when people are ready to buy.
This means cutting back on the advertising being done just to keep your name in the marketplace. Use only targeted special cooperative advertising on products in their season. Eliminate Yellow Page advertising. When was the last time you looked in the Yellow Pages for a product?
- Bill Special Orders upon receipt.
This procedure, put in place by many merchants, provides the "push back" that has been missing from the Special Order process.
Without "bill upon receipt" or some variation of it, a salesperson has no reason to delay ordering merchandise when the order is given to him. The job could be subsequently delayed--or even canceled--but the Special Order inventory is on the way or now in the merchant's inventory. With "bill upon receipt," the customer and sales person are tasked with trying to estimate a reasonable target for when the Special Order items will actually be needed.
In addition, the number of "bones in the SO graveyard" is reduced to near zero as the Special Oder items are on the customer's account. Conversations are held with the customer almost immediately upon receipt of the merchandise and now the credit manager gets involved. So it is not just an issue between the customer and his salesperson.
- Limit the amount of Accounts Receivable exposure to any single builder organization.
Yes, builders have gone out of business and you can rest assured that more will follow in the coming months. Are you willing to tie your organization's survival to the survival of one or two large customers? Your organization should limit your exposure to any one builder and related entities accounts to no more than 10% of your equity (including shareholder loans). You will be asked repeatedly to become the bank for your customer. The bank does not sell building materials and you should not lend money.
Also, look at the level of sales to one organization. If your sales level to one organization exceeds 5% to 10% of your total sales, can you really afford to say "no" to the customer on future credit and service questions? As hard as it may be, working with the customer to limit the size of their accounts, it is just as important in these times--if not more so--than in the good times.
- Institute an "Environmental Fuel Charge."
There are many approaches to this, but the one that has drawn the most traction is a flat rate charge of $25 per delivery. One merchant reports this charge has generated over $10,000 per month in added revenue.
- Prepare three-year pro forma financial statements and share it with your lenders.
Your banks and other lenders are just as nervous during this slowdown as you are. Giving them a realistic briefing on what steps you have taken and are taking will lower their anxiety level. During these briefings, a discussion of waivers to loan covenants may be needed. Have key people in your organization involved to discuss various aspects of the plan. Give best/worst/expected case scenarios, so that the lenders can see that there was some real thought given to the plans.
- Apply for the 50-cent-per-gallon federal motor fuel tax onpropane used in forklifts and bulk purchased propane.
This credit runs through Sept. 30, 2009, and may be extended. Go to www.propane.tx.gov for a sample form needed to file. You can get the actual form 637 from www.irs.gov. If you have propane forklifts, this is a must-do, because it is free money left on the street if you do not apply. If you do not use propane in any rolling stock, this credit by itself does not cost justify conversion to propane.
- After-Action Review
(Not really a nuts-and-bolts cost-saver/cash-flow generator, but an absolute must in these slow times.) If you are not now using after-action reviews on a daily basis at the end of each day with all your team members, let me suggest that you begin this process on at least a weekly basis. The objective of these reviews is to see how tasks scheduled for the day or week succeeded and what added emphasis is needed in the future to insure success. This is both a training and management tool. Take notes on discussions so that folks can be held accountable for changes needed for success.
Yes, you can sit back and be overwhelmed by the market challenges, or you can take proactive, aggressive action to insure your company's survival and strength as we come out of this temporary economicdownturn. This is what leaders are paid to do--take leadership action!
Richard Heath is a CPA who has been involved with the building materials industry for over 28 years and has a practice in Surfside Beach, S.C. You can reach him at firstname.lastname@example.org.