Ops #3 - Sources of Cash

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I’ve often said that every manager should have the experience of worrying about making payroll, or paying the company’s bills. It has a way of focusing the mind and giving a greater appreciation for money and how precious it is. I learned this lesson when I had to lay off almost half the office staff and was having daily conversations with vendors and asking them to extend us a little more credit while we got the company’s operations and finances healthy. At one point, over half of the company’s payables had aged more than 120 days.

I had been in the job for less than a month when I called a meeting with my staff and wrote the single phrase on the white board that you see as the title of this post. After explaining the severity of our situation, we brainstormed how we might find some money to keep us afloat.

Here is what we came up with:

Owners invest cash

Borrow money

Sell Shares (ownership)

Sell Assets

Cut expenses

Delay vendor payments (stretch AP)

Collect Accounts Receivable (AR) faster

Reduce Inventory

Make a profit

That’s what we wrote, so let’s take them one at a time.

Owners invest cash – The owners had no money to invest.

Borrow money – The owners had already mortgaged their homes to keep the business going and we were only able to keep operations going using a line of credit from an asset lender. Basically all customer payments went straight to the lender and they would release cash according to their asset calculations. This arrangement impacted many of our other suggestions because selling assets or reducing inventory had the unintended consequence of reducing our ability to borrow.

Sell Shares (ownership) – There was no appetite for this from the owners. It was a family owned business and they were not ready to bring in additional partners, even if they could find some.

Sell Assets – Buildings were leased and the equipment was pretty unsophisticated and very old.

Cut expenses – Half the staff was already gone and we had been in the situation for so long, there was really no where else to cut. We didn’t spend a nickel that wasn’t absolutely necessary.

Defer payments (stretch AP) – We already had over 50% of vendors more than 90 days past due. Any further and we would be shut down.

Collect AR faster – We had very little leverage with customers due to poor quality and their concern for our viability. We did redouble our collection efforts, but it didn’t make much difference. Most of our customers were reasonably good payers.

Reduce Inventory – This turned out to be the silver bullet and was the only realistic chance to get a one time injection of cash. Through very aggressive actions and by doing everything anyone could think of, we reduced our inventory by half. It created the cushion we needed and gave the business some time to fix operations and do what was really the best way to generate cash – make a profit.

Make a profit – The company had experienced two years of steady losses. We turned our first profit in the second month of the turn around with a 50% increase in revenue, which was entirely from past due orders. With dramatically improved operations and quality, the profits started to be predictable and the company had healthy cash flow from operations after about a year.


Yes, this really happened.

Can you think of any other sources of cash?

How do you keep a company from getting into this situation in the first place?

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