Focus Your Firm on Cash Flow, Discipline, Advises Consultant
Focusing on cash flow and ignoring misleading accounting "profits" are important financial strategies to follow in keeping a business viable during economic or market downturns, a leading distribution consultant advises.
Bruce Merrifield, president of the Chapel Hill, NC-based Merrifield Consulting Group, recently advised members of the North American Building Material Distribution Association (NBMDA) that it's essential during these times to pay closer attention than normal to receivables. That means writing off receivables that are past 90 days, as well as inventory that hasn't moved in the past 12 months.
"These measures may generate huge accounting losses, but they all either generate cash in hand or allow a firm to get a check from the government on a tax-loss, carry-back basis," Merrifield advised members of the Chicago-based NBMDA, which includes cabinet distributors and other people with ties to the kitchen and bath industry.
"Don't report fictitious profits and pay taxes [on that], which is money flowing out of the com-pany," Merrifield remarked.
The age of receivables generally lengthens during a downturn, and how distributors handle those delays should depend on the track record of the customer in question, Merrifield pointed out.
"Well-managed firms are good for the cash," he said, adding that an "ongoing, disciplined collection system will nudge them back" into paying on time. By contrast, overextended companies, or firms with no track record, need to be dealt with before the situation escalates out of control, Merrifield said.