by Dustin Siggins
James Boening has seen it all in the car industry. In a career spanning more than three decades, he founded and sold a dealership lending company for $20 million; lost businesses “because of cash flow mistakes”; and oversaw 90 franchised dealerships as a national director for pre-owned operations for Fortune 500 company Asbury Automotive Group.
Today, Boening is a widely sought-after speaker at car industry conferences. He’s a thought leader who often appears in industry press. And he told Zenger that while the used car boom of 2021 is a profitable opportunity for dealerships, it also presents operational and cash flow challenges which “can put dealerships out of business.”
“It can take hours or days to complete a contracts-in-transit operation, also known as cash a dealer pays for a sold car until the loan is complete,” said Boening, who previously told Zenger that large dealerships may have $10 million out of pocket for contracts-in-transit. “Each used car purchase during this boom is an opportunity to make thousands of dollars more than the original value of some cars. However, most of these purchases involve loans, so a company that mismanages its contracts-in-transit puts itself at severe risk because of the amount of money out-of-pocket at any one time.”
The relationship between cash flow — the money coming in from customers, investors, and lenders; and out to staff, vendors, shareholders, lenders, tax agencies and utility companies — and operations — how well cash is utilized while in a company’s accounts — is heavily intertwined.
Companies with slow seasons have valleys and mountains of cash flow regardless of their operational costs. Small restaurants can have more operational challenges — like many daily customer transactions and multiple daily product drop-offs — than multi-million-dollar consultancies.
Contracts-in-transit is an example of a company receiving cash-in-arrears — a payment system which makes efficient cash flow a challenge because the company puts its services, product and money out in front of receiving most or all of the money from the sales. Car dealerships must make this process as seamless and smooth as possible, or their operational inefficiency will ruin their cash flow — and, as Boening pointed out, risk putting them out of business.
From major multinationals to mom-and-pop restaurants, every company must have efficient operations to improve cash flow and create growth. It starts with understanding cash flow, how operations affect cash flow, and how to make them work together.
Why is cash flow important?
Positive cash flow typically indicates that a company has effective accounts receivable and accounts payable operations, including good relationships with customers. Negative cash flow often indicates the opposite, such as when a company:
- Has slow seasons during which fixed costs are higher than income.
- Completes work but cannot collect for weeks or months.
- Ties up cash in product purchases or new hires for large-scale projects for which a client hasn’t yet paid.
“Companies with good cash flow can better protect relationships by always paying vendors, staff, partners, shareholders, etc.,” said Ryan Huss, vice resident of operations at affordable, a business-financing provider “They can also invest in talent, product development, advertising, and company expansions.”
In a similar vein, Old Dominion National Bank market executive Todd Rowley told Zenger that many small business owners “try to achieve positive cash flow through debt instead of creating good processes” for business hiccups and day-to-day operations.
“We saw this strategy fail during the last recession, when debt-laden businesses with low liquidity suffered worse than companies with less debt and more liquidity,” he said. “Conversely, many companies develop operations with great cash balances. However, they don’t have the cash on hand to make large capital purchases or to complete an acquisition. Instead of using debt as a tool for scaling, they simply miss out on opportunities.”
As discussed in a previous article, most small businesses should be debt-free until they have an opportunity to scale. But to have the cash flow to grow steadily and take advantage of opportunities to scale, you must have efficient operations.
How do operations impact cash flow?
Two bridges link cash flow and operational efficiency. The first is people; the second is company functions.
“Efficient team processes and management help create timely funding and money collection, respectively,” said Boening. “Negative cash flow happens when delivering cars with wrong or missing paperwork, or finishing work but not collecting money in a timely manner. There are hundreds of small tasks within each of these operations which can result in more efficient cash collection or create cash flow problems.”
There are many types of operational inefficiencies which impact cash flow. Several common ones include:
- Up-front product purchases with payment delays until after work is complete — risking losses if a client doesn’t pay or delays payment. Federal contractors often face this challenge.
- Product taking up space longer than necessary, resulting in low cash on hand and lower sales. This can happen to home builders, retailers and auto dealerships.
- Services provided but not paid for until 30 or 60 days in arrears, putting a crunch on cash on hand as fixed costs don’t change. This happens with consultancies, accountants, and lawyers.
- Slow seasons which result in low cash flow and reduced cash on hand. Roofers in winter and Christmas-oriented retailers in summer face this challenge.
Cash flow-challenged companies can’t ask staff, landlords or lien holders to wait on payments. They must find ways to fix the problems. For example, looking back at our list of operational inefficiencies, companies can make simple — if not easy — changes:
- Payments-in-arrears becomes pay-as-you-go or some payments up-front.
- Building a faster customer processing system. This can apply to hair salons and restaurants who can turn tables over faster, consultants who create more streamlined ways to service clients to increase staff productivity, and companies which push product out the door faster.
- Creating additional revenue to reduce or eliminate the impact of slow seasons. Accountants can add strategic financial advice to their services, and roofers can add indoor renovations in the winter.
Turning bad operations into good ones may be the hardest part of turning a cash flow-restricted company into one with positive cash flow. But the rewards — such as massive profits for car dealerships in 2021 — make the journey worth it.