Chapter 2 -
Analyzing your current situation

Perhaps you recognize that you have a cash flow problem, but you don’t know how to fix it. Just like diagnosing an engine problem, you simply analyze the major components one by one. The major components of your cash flow engine are:

1. A base of good financing, including adequate owner capital.
2. A balance of debt, spread properly among types of assets financed.
3. A well-trained and effective management team executing a good business plan.
4. A system to produce and collect revenue as quickly as possible.
5. A system that allows you to pursue your goals and keep your money until the last possible moment.
6. A plan that controls and monitors all the above and reinvests in the business as it grows.

If you have cash flow worries, one or more of these systems probably isn’t functioning as it should. The only way to determine which one or ones is to inspect them individually and compare them to benchmarks of good cash management techniques in the trucking industry.

This chapter should guide you through the rest of the book. In fact, as you read this chapter, you may find it useful to skip ahead to the referenced chapters.

What is normal?
Is your company’s overall financial structure set up for financial success? If not, frequent cash flow crises are coming. Your financial statements – particularly your balance sheet – should help you analyze your cash situation. Ask your accountant to prepare a multi-year comparison analysis and ratio analysis and obtain industry averages statistics from credit-lending association RMA (www.rmahq.org) or any number of trade groups. Worksheet 2-1 helps you compare your company against other small trucking companies, as reported by RMA. See the CCU book, How to Use Financial Statements, for an explanation of these terms and instruction on how to calculate ratios.

Are you in a cash emergency?
Do you have enough cash to pay your employees, drivers, owner-operators and monthly bills for the next three to six weeks without additional borrowing? That’s the threshold question. But if you answered no, it doesn’t mean you have a cash emergency, and it doesn’t tell you how to address an emergency if you are suffering one. See Chapter 9 for some suggestions on this concern. Answering these questions will help you pinpoint your specific problem areas.

Do you have a good financial base, including adequate owner capital? No company can survive long without owner capital. But what is adequate? And what if you plan to build your investment inside the business?

The average owner’s investment – in the form of initial capital, subordinated or no-interest loans and retained earnings – is around 30 percent of total assets, according to RMA. This means that for every $100,000 in assets, the owners have put into – or reinvested profits in – the com-pany at least $30,000. Hard to do? You bet.

Many people start businesses with little or no capital. If you do this, plan on not taking any salary, or an extremely small one, for many years. It’s virtually impossible to go to Las Vegas on borrowed funds and come away a big winner. It happens, but those who carry a stash to start with have a greater chance than those who just have pennies.

If you’re undercapitalized, you have a few options:

• Grow very slowly and reinvest virtu-ally all profits.
• Convert additional personal assets into cash for the company.
• Take on partners with money.

Take on partners as a last resort. Issues raised by adding owners are stickier than those raised by a lack of capital.

Do you have a balance of debt, spread properly among types of assets financed? Make sure you are financing your assets properly over the life of those assets. Accounts receivable and other current assets should be financed first with vendor debt, some permanent owner working capital and the balance with short-term bank notes or factoring. Use longer-term debt to finance power units and trailers over the time that they will produce revenue.

Accounts receivable make up the largest part of current assets for most trucking companies. Figure your working capital and your current ratio:

For example, if your current assets are $1,355,500 and current liabilities are $523,000, then your working capital would be $832,500 and your current ratio would be 2.59 to 1.0. This is quite a healthy company, because the average trucking company has only a 1.25 to 1.0 ratio. Below average, and your cash crisis will tend to recur.

According to RMA, the average long-term debt is 75 percent of net fixed assets. Figure yours as follows:

For example, if your long-term debt is $725,000, and the current portion of LT debt is $125,000, then the total is $850,000. If net fixed assets are $1,375,000, then the percentage financed is 62 percent. Again, this would be quite healthy.

Chapter 12 will help you understand if your accounts receivable and accounts payable are in range and if you should use factoring as an answer. Approaches for equipment and long-lived assets are discussed in Chapter 13.

Do you have a well-trained and effective management team executing a good business plan? Are your management activities helping your profitability and growth? Do you have a written business plan? Are you servicing the right customers? Are you regularly monitoring performance?

In the competitive trucking business, cost control is the watchword. The key to profitability often lies in managing expenses, as measured by your operating ratio.

Unless you can regularly keep this ratio at 94 percent or below, it’s unlikely you can grow cash because your profitability is just too low to sustain growth.

Although this book focuses on cash flow management techniques, the truth is that sound management strategies will cure most long-run cash problems. You can implement many cash strategies, but if you forget about the fundamental management concepts, the cash won’t stay around for long. Chapter 8 discusses the importance of your management plan to improving cash flow.

Do you measure the performance of your system to produce, then collect, revenue as fast as possible? Do you understand and regularly measure your cash cycle times? How many days does it take you to invoice your customers after shipment or collect money from your customer after the bill is sent?

The process is similar to dispatch. You know how long it should take a driver to deliver a load and schedule trucks accordingly. If a driver takes significantly longer, then you raise questions.

You should have the same feel for your cash cycles. You should know how long it actually takes to invoice a customer. Chart the actual time between delivering the load to the actual mailing or transmitting the invoice. Also, how long does it take your customer to pay that invoice? Chapter 4 addresses other operating cash cycles, such as how much cash you’ll need to put a new truck on the road. See Chapter 6 for help on shortening the time period your cash is tied up.

Do you measure the performance of your system to spend money in pursuit of company goals and release it at the latest possible time? After you understand your operating cash cycles on the revenue side, explore them on the disbursement side. On average, how many days after receipt of an invoice do you pay it? The well-known concept of wisely using other people’s money works as long as you maintain a good credit rating. Consult Chapter 7 to learn how to lengthen the time you hold your cash by effecively timing your disbursements.

Do you have systems and controls to monitor all of the above and to reinvest in the business as it grows? Can you forecast cash flow surprises before they pop up? It’s not unusual for small companies to have no forecasting system at all. After you understand your operating cash cycles, you can learn to predict how much cash you will have at any given time. Your controller should prepare reports anticipating cash shortfalls and surpluses. If you want to expand, you must know your cash position over the expansion period. Chapter 5 addresses these concerns and helps explain how to set up the tools you need to forecast and budget your cash. After you understand the concept of forecasting and budgeting, you will need reports on forecasting your cash position so you can make informed decisions. Chapter 11 will help you create a system to produce the reports you need from a daily, weekly and monthly perspective.

Basic safeguards and controls are critical. Would you know what to look for if an employee were stealing from the company? Do you know if you are mishandling and losing money? How much credit do you extend to your best customers? Your worst customers? Cash control systems are integral to safeguard the cash you work so hard to get. Without personnel controls, segregation of duties and other safeguards, it may be easy for one of your employees to divert the cash. Consult Chapter 10 for more information on setting controls on your cash.

Are you reinvesting your cash in your best investments? Once you generate some cash, you have to choose where to use it for the best return on investment. Certainly, some should come home to the owners. But how much should be retained? Companies often make poor choices on reinvestment, either by allowing idle cash to earn too little, spending on inappropriate assets or diverting cash toward unproductive uses and starving the company. Chapter 15 covers how to increase the return on idle cash and explores the ability to earn spectacular returns simply by keeping it in the company.

In Summary
Start diagnosing cash flow concerns by looking at your company’s financial results and how you compare to other trucking companies. Then, systematically review all the components of your cash flow engine and tune up the areas that show the roughest performance.