Giving thanks & for cash flow

As my toddler sculpted her mash potatoes into something resembling, well, a lump of mash potatoes, I looked around at the Thanksgiving table. Smiles all around, not only because my daughter's so darn cute (no bias on my part, of course), but also because they knew they didn't have to clean up the mess. Still, the good food and good conversation got me thinking about how thankful I am for friends and family. I know, it's a hackneyed, Hallmark thing to say, but it happens to be true.

The next morning I opened the newspaper. Dubai World had taken a nosedive, and world markets were spooked. At that moment I thought of something else to be thankful for, something that probably isn't on any Hallmark card, at least not the mushy ones.

It's cash.

The week before Thanksgiving, I walked the halls of the FABTECH® Intl. & AWS Welding Show, which for the second year included METALFORM. Many said it was the first good show they've been to all year, a sign perhaps that we're slogging our way out of the recession. More than in past years, though, attendees and vendors exuded a no-nonsense approach to business. Everyone seemed to be more realist than idealist, which is why a PowerPoint slide during one FABTECH conference session caught my eye. The slide showed a line that represented the pulse of any business: the cash flow cycle.

"Cash flow is a dominant financial metric," said Dick Kallage, a business consultant with KDC & Associates, Barrington, Ill. "You can mess with your P&L statements to make them look good, but you can't do that with cash flow. You don't make payroll with receivables and inventory. You make it with cash."

The line on the PowerPoint slide depicted the time between "cash out" and "cash in." The cycle starts with the order, which triggers material orders, the production cycle, material payment, shipping, invoicing, and the ultimate payment from the customer—that is, "cash in."

The trick in modern manufacturing is to reduce the time between receiving the order and getting cash for it. In other words, shops want to shorten the cash cycle, something that, according to Kallage, is especially critical during this economic recovery. To muddle through the decline, companies cut costs left and right. Now that businesses are cut to the bone, they're preparing for the upturn. That takes investment—that is, a lot of "cash out." With credit still tight, getting money to pay the bills isn't as easy as it was. Without robust cash flow, companies can run out of cash just as the economy is getting back on its feet.

Kallage spelled out several ways to shorten the cash flow cycle. One problem area on everybody's mind is collections. No one's letting cash go easily these days. The trick, Kallage said, is choosing customers carefully (a luxury these days) and perhaps finding a reputable bank for revolver or factoring loans, which pay about 80 percent of the invoice within a day or two of shipment.

The most significant gains from reducing the cash flow cycle, however, can be found on the manufacturing shop floor, and this is where lean manufacturing and strategic sourcing come into play. Some fabricators in the seminar spoke about their success with vendor-managed inventory, whereby the shop receives the material in inventory but doesn't pay for it until it hits production. During production, lean practices such as setup time reduction and part flow efficiency (pull production, etc.) work wonders for cash flow, simply because they shorten production time.

After the seminar, I rode the escalator down to the tradeshow floor and looked at the technologies on display from a new perspective, one buttressed by a few progressive fabricators I"ve spoken with during the past few months. When these managers thought about buying new equipment, they didn't think about return on investment, and they sure didn't think about increasing capacity. Who needed to do that this year?

Sure, ROI on capital equipment is important, but what really matters is cash flow. If new equipment can shorten the production cycle and the time between "cash in" and "cash out," it can help change a business for the better. It's not only about ROI; it's about quick response.

Cash is the lifeblood of any business, even ones as complex as Dubai World. According to the Wall Street Journal, the fact that Dubai World has significant cash flow is one reason that investors won"t let Dubai World fail.

Most important, cash gives employees a living and allows them to enjoy the best in life. For me, that includes friends, family, and a mess of mash potatoes around my daughter's placemat.