Surviving Illiquidity

One sure way to improve cash flow is to grow revenue. Think outside the box when it comes to strengthening the top line. To protect revenues from existing customers, beef up loyalty programs, for example. Spend marketing dollars on programs to improve immediate revenues. Rethink your product mix and pricing strategies.

The most immediate way to raise revenues is to increase prices, if the market will bear it. Are there any features that can be added inexpensively to allow increased prices? Can you bundle products and services into new products, or sell extended warranties or service contracts? At the same time, you should segment customers to reveal which products appeal to customers willing to pay higher prices.

While you are focusing on the top line, don’t take your eyes off of gross profit margins. Find out where your value creators and value destroyers are by evaluating margins by product category and by customer. Now is a good time to dispose of noncore businesses and assets and refocus on what your business does well. Even if business units or nonessential properties are sold below market values, those divestitures are quick ways to raise cash and improve liquidity.

One unprofitable company that we recently counseled had a growing division that management thought was profitable. However, when overhead was accurately allocated, it was discovered that the division was losing money. And when we properly priced the division’s products, they couldn’t be competitive. The company eliminated this division, and as a result, became profitable.

Another way to internally generate cash is to examine what’s going into your cost of goods sold. Can your labor force be more productive? Are you using Lean and Six Sigma processes? Are you negotiating with vendors to get the best prices on your materials? Are you getting rid of surplus, obsolete, or impaired inventory?

Can you increase your inventory turns? If your inventory turnover happens four times a year, you have three months’ worth of materials (cash) sitting on the shelf generating no return. But by turning inventory six times a year, you’ve reduced that to two months’ worth!

Be aggressive in reducing costs and increasing efficiencies—nothing is too controversial in these times. The bright side of a difficult economy is that it forces the hard decisions that should have been made in the past. Remember, a dollar of revenue may create 10 cents of net income, but a dollar of eliminated expense creates a dollar of net income. Examine each general-ledger line for nonessential items, but don’t do this alone. Ask managers and employees for ideas. Get rid of subscriptions and rented plants. Cut back on travel and entertainment expenses. Evaluate marketing and product development programs. Assess the number of employees in the company and whether you are getting value from every position. Be ruthless, creative, and innovative.