In an ongoing effort to help you and all business owners get your arms around a common problem — cash flow (or NO cash flow), Jeff Allen welcomes another expert who has worked with hundreds of business owners to get their money moving again. Scott Shields, CPA and founding partner of Shields, Blice & Company CPAs in Ohio returns for his second appearance on “Deal Talk.” In our discussion, Scott explains the impact cash flow can have on the very value of your business, as well as any attempt you make to sell you company. Then, in the second half of our program, he’ll talk about the steps you can take right now to quickly improve cash flow in your business.
Debt is not a bad thing as long as it's incurred for the right reasons and at a reasonable interest rate... But just because we have debt and we have a little extra cash one month doesn't necessarily mean the proper course of action is to pay that debt down.
- Scott Shields
Jeff: Is cash flow or the lack of it keeping you up at night? If you're looking for answers to your cash flow-related questions, you've come to the right place.
From our studio in Southern California, with guest experts from across the country and around the world, this is “Deal Talk,” brought to you by Morgan & Westfield, nationwide leader in business sales and appraisals. Now, here's your host, Jeff Allen.
Jeff: Welcome back to the web's number one content source for small business owners committed to building a business for eventual sale. Here on Deal Talk it's our mission to provide information and guidance from our growing list of trusted experts that you and all small business owners can use to help you build your bottom line and improve your company's value.
If your business is challenged by cash flow issues, you are in good company. And to help us get some ideas about the causes and what you may be able to do about it, I'm joined by one of the best numbers guys who ever push a pencil. His name is Scott Shields, CPA and founding partner Shields-Blice & Company CPA's in Fairlawn, Ohio. This is his second time joining us here on the program. Scott Shields, welcome back to Deal Talk my friend, it's good to have you.
Scott: Hey, thanks so much Jeff. I have looked forward for the last couple of weeks to be in back on the show.
“You need relevant, pertinent information, and it needs to be in real-time. If I don't have bank reconciliations done, or if my books aren't even closed for the month of January and here I am approaching the end of February, maybe I don't have the right person in that job supplying me with that crucial information, so I can make those business decisions.”
Jeff: Well, we appreciate that Scott in making yourself available. We know that you're a very busy guy so we're just glad to have you back. Scott, you know, cash flow it's a problem. It's a problem for many companies. If I put a list of 100 companies of all market caps, public and private, null industries in front of you right now, how many of those companies might you imagine based on your experience of course have had cash flow issues in the past, or are being challenged by cash flow problems right now?
Scott: Well, unless you're Google or Apple I think that in a 12-month cycle every single business does experience some form of cash flow crunch where they've got to go back to the financial, back to the numbers to determine how they're going to get through that little bit of business pain that they're experiencing with that cash flow problem.
Jeff: What are the most common reasons Scott that this is such a problem for so many small businesses really I'm talking about now if you want to think about a small to mid-cap businesses. For those companies that experience cash flow issues, what are some of the reasons, the most common problems?
Scott: Well, I guess from the basic standpoint it is a failure to plan Jeff. And whether it's planning to collect your receivables, to send your billings out on a timely basis, price your product, or just utilize your financial statements, I think there's a number of reasons that cause these cash flow problems. But I would have to say that it's just a failure to plan for these things.
Jeff: And that is incumbent really on the owner, him or herself, and maybe just a failure to understand the basic principles of accounting, is that it? Or is it they don't have someone who is there with them on the team who can handle that?
Scott: I think the answer is yes to both of those items. I think the ultimate responsibility always rests with the business owner. I've run into situations before Jeff where business owners say, "I've got my controller, or I've got my bookkeeper, or I've got my accounting manager." The bottom line is, just like Harry Truman said, "The buck stops here," and the buck is stopping with the business owner. And they need to be involved on at least a weekly basis with what's going on from a cash flow standpoint. And I'm not talking Jeff about looking at the bank balance to determine whether it's positive, negative, or two figures, or five figures. They need to be involved much more deeply in the planning process.
One of the things that we do on a regular basis with our customers and our clients is it's not just planning for the current year or up and coming year, it's also about talking about what historically has happened if your typical sales, or five, or 12, or 15 million dollars and your collection ratio is running 45, 48, 50 days, you got to take a look and see why is that and address the fundamental issues. And I think maybe business owners just fail to recognize what those issues are. They say, "My customers aren't paying me." My answer is why is that not happening? I think we got to get back to the basics.
Jeff: If I'm trying to sell my business right now Scott, and cash flow it's been a problem particularly of late, maybe the last six to twelve months it's been just kind of a real struggle. How much of an impact is that going to have not only my ability to sell my company but just really basically on the value of my company?
Scott: Well, I think it's going to impact both of those Jeff. Number one, is that if you're having cash flow issues, you're already adding negotiation disadvantage because you don't have the money to make the payroll, pay the bills, whatever the case may be, and now all of a sudden you may be dealing with an organization that you are hoping is going to be your white knight and bail you out when in fact part of that process may to be to use that poor cash flow against you to bring even more pressure to bear on you for potentially a lower price or for better terms for the buyer. So I think it has huge impact.
Also, as a buyer, when we're working with many of the organizations that retain us to assisting in the purchasing of companies, that is one of the things we look at. When you look at the financial statements or when you look at the tax return, just because there is profit on the tax return does not mean that money is necessarily being collected if they're on ___________ basis. And maybe, yeah they're profitable, but they can't even make their payroll that week or for whatever given period of time. So it does have impact. We analyze it, we determine it. I want to always make sure that the cash flow is adequate at a minimum to not only service the debt but also to service the general operating cycle of that business.
Jeff: Is there a rule of thumb Scott that you follow or that you apply with regard to maybe a percentage in reserves that a company needs to have at any given time to fall back on in order to ensure that they've got that cash on hand?
Scott: There's no real rule of thumb. I think that what our mothers taught us is kind of the golden rule in this situation which is I think you need to have the ability to access at least one minimum of one month operating cycle money. Now whether that's money in your bank account, or whether it's just a cash line of credit setup with your bank either one of those is good. One of the things that we do find out and we run into also Jeff is people who utilize their line of credit, and the line of credit should be one of those items that is to get you through some of those cash flow crunches or low cycle in your business cycle. But what people many times use it for is to support their business. The whole idea of a line of credit is you get the money, it helps you through that rough part, and then you pay it back. Most banks require that on lines of credit that it be zero for at least a 30-day period. Many banks have 60- or 90-day periods, it's just to get you through that tough part. I would say, at a minimum, no less than one-month access to either cash or low line of credit through your lending institution.
Jeff: You've kind of answered a question just a few moments ago I think Scott that I had planned to ask you. And you worked with so many companies over the years, but how often have you been witness to a situation where, and you kind of illustrated this a little bit ago, again, where you've gone in and the company showed all signs of a successful, healthy business, sales number's good, your earnings and revenues showed strong growth but the cash flow is just out of sync with the other numbers. How often does that occur?
Scott: It does happen and it happens many times on a regular basis. And we want to understand why there is that cash flow crunch. Maybe it is they've paid too much on their debt. I get asked all the time, "Hey, shall I pay my debt off?" Debt is not a bad thing as long as it's incurred for the right reasons and at a reasonable interest rate. Debt is very important to a business in order for that business to grow. But just because we have debt and we have a little extra cash one month doesn't necessarily mean the proper course of action is to pay that debt down. Now all of a sudden I got less debt but I don't have the cash flow if for some reason they do one, or two, or three big invoices that I send out in the up and coming month, or a little bit slow in getting paid. Now, once again, it puts me in that situation where I may have trouble making payroll, or making my other obligations for my business.
Jeff: That man right there is Scott Shields. He's a CPA and founding partner at Shields-Blice & Company CPA's in Fairlawn, Ohio. They actually have a couple of offices, don't you there Scott?
Scott: Yeah, we do. We've also got our office in North Canton, which is in the Southern part of our county but it is a tremendously growing area, very close to the Akron-Canton Airport which has been growing over the years and bringing us lots of opportunities down here in North Canton, Ohio.
“The time to get that line of credit, that revolving line that's always available to you is not when you are up against the wall and not able to make payroll. It’s during the fat season when you're flushed with cash, when you don't really need it... Get it in place right now.”
Jeff: And we're going to tell you how you can get in touch with Scott and his team toward the end of the program so keep it here. This is “Deal Talk,” my name is Jeff Allen. Scott, when you go in and you meet with a client, maybe the first time, second time, third time, it doesn't matter how many times, and you start to get to the root cause of these issues and you start to put a plan in place to help the client dig out of this situation and maximize cash flow once again to get the train back on the rails. How many times will you say, we shouldn't even say how many times, but how common is it that a business owner as comfortable as those cash flow issues might be are really kind of uncomfortable with some of the changes that you might ask them to make? Is it true that sometimes some of these things that you might ask a client to do are things that may not necessarily feel very comfortable at first?
Scott: I think you're absolutely right, Jeff. One of the things that we absolutely don't have that a business owner has is I don't have the emotional attachment. So I'm able to look at things in a little bit different light. Just because an individual has been with you for a certain period of time doesn't necessarily mean that individual is still performing at a level they should. Just because you have had the same customers year after year after year, maybe you're finding an exodus of those customers because you're not keeping up with technology, or whatever the case may be. And I can walk into a business owner's office and I form my first opinion within about one and a half seconds of walking in his office. If I walk into an office that's got piles of paper everywhere, stacks on the floor, filing cabinets hanging out, and the guy's got an old flip phone on his hip, I already know that I got my work cut out for them.
Jeff: Used to like flip phones. I felt like I was a character on Star Trek walking around with one of those. And I like to remember the old Motorola Razr's, remember when they first came out they were nice and thin. Anyway, it's another story for another day. But what are maybe one or two things that some folks are most resistant to doing that you advise them to do that really can cause them maybe some short-term pain on the way to getting things corrected again with regard to cash flow?
Scott: I want to look at the whole vertical integration on their operation. I want to understand what it is that they do. And then we're going to look at the entire process, whether it's a manufacturing operation or a service operation, I want to look at everything. What is it they're holding out to the general public that generates them revenue? Is it something that is on the decline, is it a very stable industry, is it growing? I then want to take a look at how are they pricing it out? It's amazing to me Jeff. When I ask individuals what are their fixed cost and their variable cost I get the deer in the headlights. And they're not even sure what is the nut that they have to crack each and every month. And if let's say they're making widgets and that widget is being sold for 15 bucks, I'll ask, "What's your sub cost in that widget?" They don't know. I said, "How much are you making on that widget?" They don't know. So we got to get down to take a look at what is our margins on these things? Do I have an 11% margin, do I have a 1% margin? And then the next step is how frequently are we billing? Are we billing whenever we get time? Are we doing it religiously at a minimum of once a month? Are we doing the billing every time a project goes out? Whose responsibility is it then to follow-up with that customer based on the terms of our invoicing? Maybe we are 30 days, or 210 net 30, or something along those lines. Whose responsibility is it to make that phone call when that invoice is 45 days old and find out what's going on? Even on our whole organization we find problems that come up, and invoices and getting paid. And we call them up and we want to find out why. We're not being aggressive we're just saying, "Hey, did you get the invoice?" And many times they say, "No, we didn't." And we'll go back in because we're electronic and most of our invoices go out electronically. We'll find that there was a mistake putting an email address in, or the individual responsible for payable has changed and emails are going to the wrong person. Sometimes it's really that basic.
So we want to take a look at all those things, also making sure that that business owner is involved. If the business fails it's his responsibility. His employees are just going to go out and find other jobs. It may bankrupt him. He may lose his house. He may lose all kinds of things, so it's ultimately his responsibility to be involved and not to be delegating these various responsibilities to underlings unless he's overseeing the big picture.
Jeff: You kind of given us some initial I think feedback here in area where we're going to go into a little bit more depth after the break Scott. And we want to talk about the number of options that are available for increasing cash reserves. You talk a little bit about billing and receivables. We're going to talk about that maybe a little bit more on top of a number of other things. My name is Jeff Allen and we're talking with Scott Shields, CPA and founding partner Shields-Blice & Company CPA's in Fairlawn, Ohio. Cash flow problems, how to deal with it and what you need to do as a business owner. Some thoughts about how you can get back on track to maximize cash flow. And we're going to continue or conversation with Scott when Deal Talk returns right after this.
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Jeff: My name is Jeff Allen. I'm joined once again on the program by Mr. Scott Shields. He's been on this program before. And Scott is CPA and founding partner Shields-Blice & Company CPA's. We're talking about cash flow. You know the problem that you're having with cash flow right now. I hope you're not having a problem but so many business owners do. Scott, just to kind of pick up where we left off a little bit, we're now trying to get business owners in line with discovering how they can improve their own situation. They may be meeting with their own CPA, or maybe they might have an idea to contact you after this show is over so that you can give some ideas. But let's kind of get them jumpstarted. What really is the first step? We may be just stepping back just a little bit here and maybe asking you to kind of recap here. What is really the first step if someone feels like they've got an issue? Where's the first place that they should look and the first place that they should start in order to get themselves back on track?
Scott: I run into it a lot, Jeff. One of the first things I run into is denial. The business owner is in complete and total denial that he is having issues, whether it's cash flow issues or more severe than the cash flow issues that is potentially going to impact their survival in the business. I think number one is he's got to get with the numbers. We need to get the financials. I run into situations where we get brought in as a consultant and the financial statements haven't been done for two or three months. The bank reconciliations haven't been done for months. So I think number one is let's get the company books up to snuff, up to speed, up to date, and take a look and see what those things tell us. So the business owner should go there first. Perhaps he's got a bookkeeper, or controller, or CFO, or something along those lines, and you then have to question that individual. If those books aren't up-to-date the question is why. You need relevant, pertinent information, and it needs to be in real-time. If I don't have bank reconciliations done, or if my books aren't even closed for the month of January and here I am approaching the end of February, maybe I don't have the right person in that job supplying me with that crucial information, so I can make those business decisions.
Jeff: We've already talked a little bit about accounts payables and receivables and kind of taking a look at that. And that's one of the first places you're going to want to go, isn't that Scott?
Scott: It absolutely is. One of the first things is where is the hidden money at? And with most people that hidden money is tied up in their receivables. A good receivable report is going to give you that ageing, 30, 60, 90, and greater than 120. And we then want to take a look at what those old receivables are and what the processes are to collect those. Typically when somebody gets out there at a 120 days the chance of collection, unless there's specific circumstances goes way, way down. I typically tell my business owners, "Hey, if you're not paid in 45 days pick up the phone and find out why." It may be as simple as they didn't get the invoice. Maybe there is a dispute with the billing, what they received, what the cost is, whatever it is on there, but find out. Don't wait. Forty-five days, you've got to be asking the question, why isn't this paid? And you can do that in a real unaggressive way that doesn't put the relationship at risk. We do it all the time. We simply ask the business owners, "Hey, we sent an invoice out last week. Did you get it? Is there a problem with it?" And then be quiet, listen to what they say, and hear what those potential problems are so you can get them resolved, get a new invoice out there, or perhaps make terms. The one thing that we find is partial payment on a bill is a whole lot better than no payment on a bill.
Jeff: Boy, you got that straight.
Scott: And there's certainly no reason not to offer that to your customers.
“Being paid 98% of your bill in a week is a lot better than being paid 100% of your bill in 45 days.”
Jeff: Boy, you got that right. You know, nobody wants to endanger the relationship that they have with their clients. That's understandable. And particularly when times are tough we want to be fair with everybody and we don't want to endanger that valuable relationship that we have because in some cases that one client can be the difference between whether or not we stay in business. But at the same time you also have to take the very serious account of the fact that you have your own bills to pay, and those include the people who are working for you. So Scott, I appreciate spending a little extra time on that. Now, as far as credit standards are concerned, how can credit play a really vital role, or getting your arms around how this plays into your cash flow situation. Why is it important to look into this?
Scott: Well, there's two ways to look at it and a lot of business owners don't even recognize the fact that they're in the credit business. They are extending terms to their customers. They're selling something, whether it's a widget or a service, sending out an invoice in the promise of being paid in the future. So they're already in the credit business. So there's side to look at. The other side to look at is with your banker. One of the things I'm all about Jeff is I'm all about free. Give me some free services, I love that stuff. Almost all banks, all good quality banks have their business relationship managers, and these individuals out there are calling on small businesses, and of course these guys are sales guys. But they're also there to help with the other tools the bank has. And so very often the business owner doesn't go to that free resource and say, "Hey, I'm having issues. What do you have in your bag of products that can help me?" And it may be really basic stuff. It may be the business owner doesn't accept credit cards. We got to ask why. Being paid 98% of your bill in a week is a lot better than being paid 100% of your bill in 45 days. You get the money sooner. And a lot of people are afraid of credit cards because there's that processing fee. But very, very competitive out there with the banks right now, and you get a very, very reasonable fee.
There are also other products that the banks have. Whether it's setting up a lock box, assisting with collections, or a lot of other services they have. And some of these services do have cost associated with them, but other ones are just ideas. The business owners dealing with one business, his business. He may have some other friends that he knows that are also in business, whereas the banker may be dealing with 60, 80, or 100 businesses that are in his client base and they get a chance to see all these wonderful things that work and don't work. And they can provide that information to that business owner and maybe get them one or two thoughts whether it is establishing a credit line, using credit cards, whether it is factoring your receivables and selling them to somebody else, they all have those contacts that can help us.
Jeff: Here's one that may seem kind of obvious. If I'm making a widget, one of the things I know for a fact that my clients love about my widget is that they are the highest quality widgets available at the best possible prices available today. How much does price on my widgets affect cash flow and create this issue that I'm having right now. And is this something I need to look at, is how much I actually price the products I'm selling?
Scott: I think you should Jeff. I think that a good business owner, a good manager is going to know -- with every single widget he sells – “What is his profit margin on every widget?” If he's making a dollar on every single widget then he's got some potential wiggle room that he may be able to cut the price to another customer to gain additional business. If his product margin is too low, he doesn't have that option available to him at all. And then also looking at the variable and the fixed cost. We know that if you're paying rent on your facility, it's the same thing month after month after month, that portion of the cost of the widgets is going to stay fixed hence the name fixed cost, and there's going to be the variables. For example if I got to put more widgets out and I got to pay my guys time and a half because they're working more than 40 hours in a week, well that really drastically affects the cost on that widget, and i may find that, "Hey, I got the sale, I got the order." But now rather than making a dollar I'm only making 35 cents, or perhaps I'm even losing money on that. The business owner needs to know those costs so he knows when to say no and when to walk away from the deal.
Jeff: We're talking with Scott Shields and we're talking about cash flow and what you can do to improve your situation to help you maximize cash flow, some places that you need to look, some stones you need to turn over in order to help you kind of get resettled so to speak. And to help you get maybe hopefully a little bit more sleep tonight. But Scott we talked a little bit just a few moments ago about the importance of credit. How often will you go in to a client and actually suggest maybe the use of a loan to help maybe pad the reserves, or help them make their bills?
Scott: All the time Jeff, we work with that all the time. I am not that guy that thinks credit or borrowing is bad to grow a business, it's a necessary component. And one of the things also that we tell businesses, hey, the time to get that line of credit, that revolving line that's always available to you is not when you are up against the wall and not able to make payroll. It's during the fat season when you're flushed with cash, when you don't really need it. That way it'll be in place when perhaps you have a little bit of a downturn, maybe the company's not doing so well, maybe you're in a particular industry, whether it's the oil and gas industry that's having some difficult times. Get it in place right now. Also, in addition to the credit lines we also have those fixed loans. Whether it is to buy a new piece of manufacturing equipment and you're going to get that term loan for three, five, seven, fifteen years, whatever it might be. And use that to help grow your business.
Once again, the cash flow for that debt service has to be analyzed to make sure the return on the investment, the return on the money you're going to spend on that, maybe that new ___________ or that new person that's going to join your organization has got to be greater than the cost of the money itself. And it's called an ROI, a return on investment. It's a simple calculation to determine if I spend this money what's it do for me? What it's going to do for my bottom line? Is it going to generate me a 6% return or a 12% return? And we have to analyze that as well to make sure it's worth the time.
Jeff: Scott, we're starting to wind down now, so let's just go ahead and kind of do a quick wrap on things. Any final thoughts that you might have, an important key takeaway either from this discussion or maybe something we didn't necessarily talk about that you think might be helpful for business owners to remember when they're trying to deal with their own cash flow issues?
Scott: We did talk about getting into the numbers, number one. But I also want to caution the listeners, here's something I don't want them to do, ever. This is the kiss of death for a business, and that is if you've got a payroll and you decide not to make your payroll, tax payments, and to finance your business on that it's a disaster. Keep in mind that payroll money withheld out of paychecks it's not your money. It belongs to the employees and you're responsible for getting that to the federal state and local governments. The penalties are severe for not doing that. Also, it is a potential personal liability. Even if you go belly up you're not going to be protected from the government coming after you for that money that wasn't paid in. So be very, very careful and always pass on the temptation to make those payroll tax payments later or not at all because that will really create a problem, not only if you're trying to sell your business but if you're trying to finance your business, or if the government comes to look at you.
Jeff: Boy, indeed, that is for sure. And I hope that if nothing else that folks kind of go back and take a listen to what it is that you just talked about, because that one final point might be the best way that we possibly could have ended this particular discussion on cash flow today. Scott, if anyone would be interested perhaps in contacting you to discuss their own specific situation right now as it relates to cash flow or maybe any other issues that they might want to discuss with you, how can they reach out to you?
Scott: Hey, the best way is email. My email address is email@example.com. Send me out an email, I'll get back to them right away.
Jeff: Scott, I enjoyed this program and we hope that at some point in the future we can have you back on again. I know that there are going to be some other great ways that you might be able to help our listeners, and once again I appreciate you joining us.
Scott: Hey, thanks very much for inviting me back Jeff, it's always enjoyable.
Jeff: Scott Shields, CPA and founding partner Shields-Blice & Company CPA's, Fairlawn, Ohio. Tell a friend about Deal Talk won't you? In addition to morganandwestfield.com you can find us on iTunes, Stitcher, and Libsyn, those four channels. Or you can find us someplace on the web. I'm absolutely positive of it. Deal Talk has been brought to you Morgan & Westfield, nationwide leader in business sales and appraisals. You can learn more at morganandwestfield.com. My name is Jeff Allen, thanks so much for listening. We hope to talk to you again soon.
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