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Unformatted text preview: COLLECTION DAYS ONLY A single change, from 60 to 90 days, makes a half-million-dollar difference in the cash ﬂow.
Notice here the critical importance of cash, and the critical difference between cash and proﬁts. With
this single change in assumptions, the company is still as proﬁtable as it was, down to the last dollar.
Now, however, the company needs at least $200,000 in additional ﬁnancing.
This is new money needed; new investment or new borrowing. The problem can’t be solved by
reducing expenses or increasing sales.
Companies go out of business for problems like these. Even otherwise-healthy companies can go
out of business for lack of cash. The projection shows how this kind of cash crisis can kill a company
if it sneaks up by surprise, but can be easily managed when there is a plan for it. This is an eloquent
argument for good business planning.
In the third case, shown in the following illustration, we set the collection days back to the original
assumption of 60 days, but change the assumption for inventory. Where previously it kept an average
of about ﬁve weeks’ worth of inventory on hand, in this changed assumption it now keeps two
months of inventory on hand. Accountants call this Inventory Turnover. The changed assumption
creates about as large a cash ﬂow problem as the extra month of collection days. CHAPTER 14: ABOUT BUSINESS NUMBERS 14.11 CHANGING INVENTORY ONLY The change in inventory assumption shows the cash balance is again well below zero.
The implications of this chart are massive. This is still a proﬁtable company, but it has a critical
ﬁnancial problem. You see how the cash balance bar falls to zero in November, and almost $200,000
below zero in December. That means that this company needs new money, new loans or new capital
investment, to make up its cash deﬁcit, even though it is still proﬁtable. This is hard to swallow until
you see it happen in real business, but it is the truth and it will happen. Linking the Number...
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- Winter '09