Driving home from work Steve, the CEO, reflected on the truth of what he didn’t want to hear. It was obvious that everyone was trying hard and, with the pressure he had been adding, some tempers were beginning to fray.
Just that morning, Financial Controller Rob had been in his office again. It seemed like he was in there every morning now with one dire prediction or another. Margins had been tight for some time but, even as volumes were rising, the cash flow still did not look good. The business was now almost always operating in overdraft, sometimes dangerously low, and the banks were starting to ask for regular updates.
Parking at home, Steve put on his ‘Honey, I’m home’ face and went in for dinner, determined not to have another evening at home ruined.
In the morning, feeling somewhat refreshed and determined to get to the bottom of the cash flow issues, Steve calls up Rob.
“Hi, Rob, why is it that our cash is declining even with our volumes improving? Where is all the money going? The financials are still reporting a profit so surely cash should be rising? Why is our overdraft getting worse?”
“Steve, Steve, give me a moment, I have only had one coffee. I need another before you machine gun me questions like that.”
Pouring another coffee, Rob turns on his tablet and sets it on the kitchen bench. Flicking through the financial tabs, Rob settles onto the company’s month-by-month margin and cash flow report covering the last six months.
“Ok, Steve, let me start by summing up the generation of cash and then let’s move onto where that cash goes.”
“Steve, as we have discussed on a few occasions, our volumes are rising but our core margins have fallen.”
“Yes, I know that,” interrupts Steve, “the added volumes should be more than making up for the margin decline!”
“It’s not that simple, Steve. With the higher volumes, the total cash generated is actually going sideways. We have had to put a tight cap on personnel costs to ensure margins are realized from the increased volumes but we are coping more and more penalties and charges. Some of these are more than the profit on the job!”
“Yes, Rob, Carol is cleaning that up and what’s more, she is on a mission to free up the hidden capacity you and I agreed we have.”
“Steve, I wish it was that easy. Carol’s up to her neck firefighting. She’s constantly coming to me for hiring approval and I usually have to say no. Don’t get me wrong, she has made gains but the gains are not keeping up with the extra volumes Jeff (Sales Manager) is bringing in. For Carol to catch up, Jeff would have to stop selling.”
“Hang on Rob, are you saying that the cause of our cash problem is that Jeff is selling too much? I can’t get him to sell enough. We need more volume!”
“No, I am not. Steve, this is just one part of the problems the financials are telling me. The total core margins must rise so we have the cash we need to operate.”
“So, what’s the rest Rob? Why aren’t the efforts of Carol and Jeff turning into more cash in the bank?”
“Let’s talk automation for a moment. Carol has been implementing some supply chain automations to free up capacity. These projects are dragging out, as we predicted, and they are costing us in consulting fees and infrastructure investments.”
“Yes, Rob, I know about these and we need to do them. Without them, we won’t be able to handle the volumes we need. Anyway, they are only short term costs and they will leave us better off.”
“True,” replied Rob, “but they are impacting on our cash flow now and they are worsening the overdraft situation.”
“Steve, I want to do some more digging to understand the cause and verify the extent of this but… pre-payments of fees are rising.”
“Sure, Rob, but we approved this. Jeff is using these pre-payments to help close the volume deals we are getting. We can’t just turn that off without risking the volumes we have worked so hard to close.”
“Wait up, Steve, I am not saying stop pre-payments, you just wanted to understand were the cash goes. Let me finish.”
Starting to feel backed into a corner, Steve let’s Rob continue again.
“Last week I ran a report on the number of open jobs in the system versus the jobs showing across the core teams. The report showed a weird aberration. It appears that there are a number of jobs that operations claim as completed which have not been billed.”
“What?! That’s your department Rob. What is going on? How much are we talking?”
“Let me finish! My team have billed all the jobs that have been handed over to them. It appears that the paperwork is being lost, or forgotten by operations. I sent Amanda from accounts to do some checking in the job folders and sure enough the billing information had not been handed to accounts.”
“So, are you saying that some people are not doing their jobs and as a result that’s hurting the cash flow?”
“Steve, I need to find out, I will be talking with Carol again when I get into the office. This has happened before when we get loaded. It’s not a new issue, but left unchecked it can cause a large cash flow problem.”
“Ok, Rob. I’ll also talk to Carol. Her people need to be more efficient. They can’t miss billing handovers when under load and they need to free up that hidden capacity.”