Contents

INTRODUCTION    3

CHAPTER 1 – The Challenge    5

CHAPTER 2 – Key Processes    6

CHAPTER 3 – What You Need To Know    7

CHAPTER 4 – The Cash Flow Insights    9

CHAPTER 5 – Cash Flow Measurable Goals    12

CHAPTER 6 – Consistent Cash Flow Is The Goal    14

INTRODUCTION

In 2016 I was auditing an equipment manufacturing company. During the audit of the management review process I noticed there was a problem with Cash Flow to the amount of $460,000.

There was a great deal of time spent by management trying to come up with a solution to the short fall. It appeared that there was a great deal of stress attached to this issue, yet there was no solution or root cause identified during the meeting.

Later on, during the audit, I was in the Planning Department looking at their scheduling process and noticed there was one order that was 6 months overdue. That in itself was disconcerting, but as I discussed the issue with the scheduler she indicated that the order was worth $460,000.

Wow, that was the same amount as their shortfall. Was this a coincidence or was their cash flow so tight that one order being delayed would impact their Cash Flow. Why wasn’t this fact brought up in the Management Review Meeting?

I continued to explore the problem with the delayed order and was told it was because the person that knew how to build the piece of equipment died and no one else knew how to assemble it. I just sat there stunned. Why would a company with Cash Flow problems let such a large order slip and not do something about it sooner?

I never did find out why nothing was done about the lack of cross trained personnel or an action to quickly remedy the problem. This case drove me to sit back and look at the relationship between the ISO Quality Management System processes and an organizations cash flow.

This report discusses the core processes that have a major impact on a companies’ ability to control their cash flow. You will find that your cash flow is the first indicator that there is a problem with the business processes. It reflects the ups and downs of orders, inventory, operation costs, and timely delivery.

Cash flow can be affected by cost reduction, but the consistent, repeatable implementation of the process approach has the ultimate impact.

It is our mission to assist small – medium manufacturing companies continually improve their operations by providing knowledge on how to identify opportunities and risks to your cash flow as well as reduce costs and improve profits.

Regards,

Vicki Delaney and Jim Goodrich

Continuous Process Improvement Systems

www.cpisys.com

jim@cpisys.com

864-256-1056

CHAPTER 1 – The Challenge

Every small to medium business owner/manager has the same fear. “Am I going to be able to make payroll this month? How am I going to pay our suppliers?”

No matter what you do there never seems to be enough cash flow to meet all of the expenses. You try cutting expenses, but the wrong kind of cuts slow down the cash coming in. But, the end result is usually the processes slow down and billing is slower thus you have to juggle to pay your bills.

It is a constant battle trying to balance the cash-in and cash-out. I know I’m not telling you anything new. I am just bringing forth the pain of having volatile cash flow.

There is a way to smooth the flow of cash into your business, but you have to be committed to understanding the cause and effect of each process on one another and how they impact your cash flow and bottom line. This means all processes from sales to finance. Every activity in your organization has an impact on each other when it comes down to creating the output of their activities.

CHAPTER 2 – Key Processes

Every business has their own unique processes, but there are four key processes or segments of your business that actually impact your cash flow the most.

If you look at the Cash Flow model, Money in – Expenses = Cash Flow, you can see that Sales and Operations definitely have an impact on cash flow. But there are other functions that management is involved in that also have a major impact, Planning and Finance. In fact, planning and finance have an larger impact than sales and operations.

The table below shows you how each activity impacts cash flow.

CHAPTER 3 – What You Need To Know

You probably recognize a couple of areas that are impacting your cash flow stream. Cash flow can be planned and regulated if you completely understand the interaction of all of your organizations activities.

If you have an ISO Quality Management System you will be familiar with the PDCA model for business management. This model was put into effect after World War II in order to improve manufacturing output and quality. PDCA is the cornerstone for continuous, consistent cash flow.

The “Process Approach” structure is included in all ISO management standards. If you embrace this approach you will be able to structure your processes to facilitate a smooth transition from each activity and create constant output at the rate required to provide you with the cash flow you desire.

I look at the process approach purely as a chain of information, materials, and parts (input) that are used to produce a product to be sold to a customer. The end result (output) of that activity becomes an input into the next step. If the input or output is flawed, late, unusable, the following activity is stopped in its tracks. This is the first hint that your cash flow will be impacted.

Your cash flow is dependent on your ability to provide your customer what they want when they want it at a cost that allows you to make a profit. If they do not get what they want all of that work becomes a negative cash flow. The customer either sends

the product back, makes a concession, or you put more money into the product to make it right and you end up with an impact on your cash flow.

Your understanding of the process approach will go a long way to giving you consistent cash flow and never having to worry how you are going to meet your expenses again.

CHAPTER 4–The Cash Flow Insights

It is my opinion from auditing and consulting for over 300 companies in the past 30 years the main cause of volatile, tight cash flow is a lack of understanding about how each department or activity impacts the ability of the next process to deliver their product (required deliverables) on time and compliant to all of the stated and unstated requirements.

Most small to medium businesses do not take the time to thoroughly plan, i.e. look at the risks of new orders, new customers, or any changes in the organization. Everything begins to take on a zombie appearance as people do their jobs everyday doing the same thing over and over without actually asking questions that might make the process better.

This is due to a lack of understanding of the impact of their output on the company and other activities. This is known as “the silo” affect. The right hand does not know what the left hand is doing. This state of ignorance costs companies a great deal in income and ties up cash flow because mistakes are made due to miscommunication and a lack of having a clear picture of how the two processes impact one another.

I was facilitating a group which consisted of members from multiple departments. I asked the production department if the material handlers were providing them with a quality service. Surprisingly the answer was “They don’t love us. They have no idea

what we need when we need it”. You can imagine the supervisor’s dismay. He soon found out that materials were delivered by what material handling thought they needed; not what production actually needed. There was a lot of frustration on both sides. This same company was having trouble meeting their delivery goals. The ultimate result was – you guessed it – tight cash flow.

Let’s look at how you can easily review at your processes and cash flow and implement some quick process changes to level the flow. There are a couple of things you can do.

One, you can get the teams from connecting activities together and look at the input and output into and out of each group. You will quickly realize that both teams do not see eye to eye on what the correct input is for their process to be successful. Get a white board or flip chart and map out the process interaction. The information, tools, materials, skill levels, work environment and time needed to produce the output from each process. Then make a simple chart with 4 columns.

You will get a quick view of the key inputs and outputs for each department or function. Of course, there may be more inputs and outputs for each process which can be documented in a flow diagram. As you can see, there are six opportunities for error that will impact cash flow. These six inputs and outputs can result in: Incorrect order information, delivery date that is impossible, lack of capacity, skill levels missing, insufficient material availability, wrong material delivered to line, etc.

Two: If you want a simple method to look at the impact of each activity on your cash flow make a Pert diagram of your processes and the order they are done. Estimate

the time and risk of each activity to your ability to meet the customer’s requirements. This exercise is an eye opener because you begin to realize time is truly money.

Example: This is a Pert chart for a design process. Each circle is an activity. The distance between each circle represents time from one activity to another. You will notice circle 6 is dependent on receiving output from 2,3, and 5. If any of those activities delivers bad output, activity 6 is now faced with not being able to complete its activity on time and ultimately impacts the final delivery from circle 10.

There are three (3) key steps here.

1. You need to know what your core processes are – which have the biggest impact on your cash flow?

2. How do they interact and impact one another – what inputs and outputs are shared?

3. Now apply time estimates to the steps between the circles – you can then identify the “critical path”, which is the set of activities with no slack. Changing the time estimate of a step on the critical path will change the final deliverable date similarly. And if those steps actually take longer than planned, the final deliverable will be delayed by that amount.

If you know these three things you can look at your cash flow on a monthly basis and actually see which of these processes need to be improved.

 

You will also find that the least understood or communicated of the shared inputs & outputs will often result in schedule delays or rework.

You can get Pert diagrams on Lucid Charts or Visio. A piece of paper and pencil will work just as well. Circles and lines are all you need. Some processes are so complicated that you might think you are staring at a spider web.

CHAPTER 5 – Cash Flow Measurable Goals

Now that you understand what your key processes are and how they impact the time of cash into and out of your company it is time to set some measurable goals to tell you where that timeline has been interrupted.

You should know the average time it takes to produce your products. With this timeline in mind set goals at specific points that are critical to the timeline being met.

Example:

Time starts at receipt of order-

This example says there are 37 days from receipt of order to when you can expect to receive payment for the order. On day 2 money is starting to flow out for purchasing, pay, utilities, etc. By day 7 you have put out what ever cash for materials, facilities, etc. and have the balance of paying expenses vs receiving income during the 30-day period. This is a very simplified view, but it shows you anything can happen between day 2 and day 7 to slow down the delivery date and the customer payment.

I strongly encourage you to establish financial goals that reflect the performance of each process and its impact on your cash flow. I find that I need to make a chart to identify the risks and then I am able to establish the appropriate goals.

You just need one per critical process and one financial indicator. The purpose is to serve as a red flag to point to the areas that might need some changes. It is much wiser to handle a problem before it impacts your cash flow then to wait until the stuff hits the fan.

The best way to determine dynamic measurables is to make another table and look at the impact on cash flow.

I know this list looks a little daunting, but if you can just set a couple of goals it will help you understand why your cash flow is streaming the way it is and you will now know where to focus your energy on changing the processes that are impacting your cash flow.

CHAPTER 6 – Consistent Cash Flow Is The Goal

Consistent cash flow should be the goal of all businesses if they wish to reduce the stress on everyone involved. Tight cash flow creates tension and causes people to try to make it better by shifting things around. A perfect example is of a manufacturing company that has an established plan and starts moving jobs in and out to make the customer happy and hopefully get that payment in sooner.

What you learned in this book is that your cash flow is tied to everyone in your company. Every action determines whether the cash comes in when you need it and goes out when you are ready. That old adage “Time is Money” is very true for all businesses.

You can keep your cash flow consistent and avoid roller coasters by simply understanding the relationships of input and output into the various activities and setting measurable goals that will tell you where to go to ease up the flow.

Planning is the key to success. If you ask the questions that you do not know the answers to you will avoid problems and your cash flow will continue to flow.

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Discuss your cash flow with us, Jim and Vicki jim@cpisys.com, 864-256-1056

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