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Step 1 in Avoiding Bankruptcy A Daily Cash Management System

In my earlier mailing on this topic I highlighted all 10 Steps in The KGI System™ to be discussed over the next few months. I'd like to delve deeper into the first step A Daily Cash Management System.

Installing a daily cash management system is critical if the business is to get control of its cash. The system must be centralized and all decisions to spend money must go through a clearing process that weighs cash receipts against outflow to ensure there are sufficient funds at all times. Overdrafts are flags that could move your business to the Bank's Workout Department in a hurry, where they may be less friendly.

While the goal of the system is to maximize internal cash flow, there is a key task that must be carried out simultaneously -- the restructuring and negotiation of credit with the existing lender. This is a fine art because the troubled business must buy time. There is a chicken and egg problem at this juncture -- the client has lost credibility because the previous business plans have failed and the credible outside professional has not had time to develop a realistic plan. If the bank has had positive experience with the outside consultant, they will often allow time for a plan to be developed. Once the plan is developed and accepted by all interested parties, it may lead to a restructuring of the debt on a more permanent basis.

Whereas the inexperienced consultant looks first for cost reductions to improve cash flow, the experienced consultant knows they will get more immediate benefits from the Balance Sheet through the:

  • Sale of Inventories
  • Reduction of the Collection Cycle
  • Sale of Fixed Assets
  • Consolidation and Shutdown of Facilities
  • Proper Management of Accounts Payable

Each of the above is an art form because the outside consultant has to overcome "sacred cows" and vested practical and psychological interests. There are also special techniques for each of these areas and a misstep could cause immense problems.

As part of The KGI System™, we offer a 40-page Operations Review Questionnaire where our consultants divide the profit and loss savings categories into Organization, Finance, Accounting and Management reporting, Marketing and Sales, Distribution and Manufacturing. While a detailed discussion of each is beyond the scope of this mailing, the key point is that it allows the consultant to move through the process of producing cost savings in an efficient manner while avoiding those costly missteps. We know this to be true because we've used the Operations Review with over 1,000 of our clients and continue to refine it through many years of research.

Remember, Cash is King. If you run out of cash the business may be over. Many a client has shown me how healthy they will be in the long run but fails to recognize they will die in the short run and not get to the finish line. This is why implementing a daily cash management system is critical.

Take your cash flow seriously and do not depend on dreams and overly optimistic views about the future. I believe the recession we are in will last many years. The strong will survive and thrive in the long run and the weak will disappear.

Whether a Company is struggling financially or on the cusp of breakthrough growth, KGI can help. Our seasoned experts work alongside management to solve complex cash flow issues, operational challenges and other business crises. If liquidity or sale is needed, KGI provides a powerful combination of services and expertise to achieve outcomes that cannot be duplicated by other standalone consulting firms.