Managing Cash Flow

Jack B. Nimble Company Suggested Solution 339
ing trained managers to think that all they need to get their jobs accomplished is
more equipment. In this case Nimble can simply not afford to spend that much
money, and it also seems likely that even without a cash problem there is much
more projected than can be justified. In any event, that line item needs to be
scaled back significantly both to save cash and avoid becoming over-committed
to fixed-asset investment.
Arguably the most significant area of concern is the month-by-month
decline in the company’s profitability through the 20X3 projection period from
11.6 percent of sales to 9.6 percent. Something is wrong! According to the Financial
Forecast Information, fixed costs of goods sold are increasing at $10,000 per month
for the entire 12 months. That amounts to nearly $800,000 for the year. Nimble’s
reasons for these increases must be questioned, and such a review will undoubtedly
point out savings of considerable magnitude in the projected cash flow. The
profitability decline is a huge red flag, caused principally by the increase in fixed
costs of goods sold, and this problem needs to be fixed, again not only to save cash
but also to improve company operations and profitability. Any self-respecting
bank will be very leery of lending money to a company with declining profitability
of this magnitude.
Additional operational areas to review for the purpose of improving both
cash flow and profitability are
• Variable costs of goods sold at 40 percent of sales (these should be decreasing
to reflect the improvements in efficiency he should be experiencing
because of investment in equipment)
• Selling, general and administrative expenses, both fixed and variable, to
see if they can be reduced
• Taxes, a look at which might result in the opportunity to defer or reduce
some of those payments as well
Finally, Nimble should be looking at his inventory. While his inventory has
not increased appreciably since he took over the company and therefore has not
been a direct contributor to his cash flow problems, there is still a potential for
improved operations. Nimble’s inventory turnover for 20X2 (cost of goods sold
divided by the inventory balance) is approximately 4.1 times—not bad, but certainly
not exciting. The best way to determine if this number is satisfactory or not
is to examine industry statistics for the industry. We do not have that information
available, so a definitive determination cannot be made. However, if his inventory
turnover could be increased to five times, it would free up about $455,000 in
cash; if the turnover could be increased to six times, the amount of cash freed up
would be about $800,000. Those numbers will be even larger as the business
expands. For that kind of potential cash saving, inventory is worth looking into,
even though an improvement would take some time to implement—too long for
it to be an immediate solution to his existing problem.