Lead with Cash

The following sections are included:

• Contents

As I write this, the world economy is in the midst of a nearly unprecedented slowdown. Some have called it the Great Recession, while others have more boldly deemed it the 21st-Century Depression. Whatever it is called, the devastation of wealth, emotional well-being, and aggregate national output has been startling. Companies once thought to be giants have failed, such as Lehman Brothers, Bear Stearns, Chrysler, and General Motors. Others such as Merrill Lynch and Wachovia Bank have been absorbed by healthier competitors. AIG, once an insurance behemoth with a trillion dollars in assets, is now operating under government conservatorship. Less well-known victims of the devastation that litter the corporate landscape are equally noteworthy: Circuit City, Extended Stay Hotels, Six Flags, and Trump Entertainment Resorts Inc…

A man walked into his office one day and found a team of movers carrying out his desk. “Where are you going with that?” he screamed. A tall guy with tattoos and a shaved head smirked at him and replied, “The new owners are auctioning everything off.” “What new owners?” the man asked, “I thought I could work out my company's troubles.”…

The following sections are included:

• Getting Everyone to Focus on Cash

• Task 1: Deciphering the Cash Flow Relationship

• Task 2: Reporting Cash Flow

• Task 3: Rewarding Cash Flow

• Good to Great

Tom Brady of the New England Patriots is an expensive American football player. In May 2005, he signed a six-year contract extension that pays him US$60 million through 2010. But Tom's list of accomplishments is also prodigious: he made four Super Bowl appearances and won three Super Bowl victories between the 2001 and 2007 seasons; he holds the NFL record for most touchdown passes in a season and the NFL record for most consecutive team victories; and Sports Illustrated named him Sportsman of the Year in 2005. Weighing these achievements against his salary, it is unclear whether Tom Brady is an expensive football player or not…

The following sections are included:

• Product Life Cycle

• Case Study

The following sections are included:

• Porter's Competitive Strategy

• Porter's Five Forces

• Product Families and Strategy

• Product Portfolios

• Setting Strategy with Cash

• Overview

Companies have cultures. Some cultures are beneficial; others are faulty. A faulty culture hinders a company's pursuit of its main goal. A beneficial culture brings together members of the company's team into a cohesive organization that works together to achieve the main goal. Cultures can be changed. Companies can transition from a harmful culture to one that is beneficial…

No matter how much a company and its employees want to put the “lead with cash” system to work, their objective will not be met fully (if at all) unless the company redesigns its systems and procedures to accommodate the method. Existing corporate structures, incentive systems, and reporting mechanisms are inadequate for the task of making cash flow the central objective of the entire company. In order to make the transition from the old way of doing business to the “lead with cash” method, organizations need to be redesigned so that cash flow becomes an essential concern at every stage of business…

The following sections are included:

• The Number of Competitors in the Market

• The Price Level of Competing Goods

• The Frequency with Which the Product Is Repurchased

• The Perceived Quality of Your Product Relative to Your Competitors

• The Importance of the Purchase in the Consumer's Total Spending

• Product Tie-ins That Create Selling Opportunities

• Pricing Strategies

• Using Pricing to Create Cash Flow
  • Consider What the Consumer Is Willing to Pay
  • Understand the Value of Your Product
  • Consider the Product Life Cycle
  • Utilize Segment Pricing
  • Do Not Change Prices Too Often

In Chapter 5, discounted cash flow (DCF) and net present value (NPV) were introduced as important decision-making tools. Amongst the many critical business applications of DCF and NPV analysis is capital budgeting. Capital budgeting analyzes long-term investments such as machines, plants, or products in a framework which enables decision makers to quantify the financial worth of an investment. A key attribute of capital budgeting is that it creates a cardinal ranking that facilitates comparison between alternate investments. This chapter introduces another capital budgeting decision-making tool, payback period, and a hybrid version of it, discounted payback, as an alternative or supplemental methodology. The advantage of payback analysis versus NPV analysis is how it focuses on the timing of cash and cash flows…

The first wave of highly leveraged transactions (HLTs), also known as leveraged buyouts (LBOs), began in the late 1980s. Fewer transactions occurred in the 1990s after a number of companies in the first wave failed when the economy slowed down. More recently, the driving force behind leveraged deals has been the private equity business. Private equity has grown exponentially in the past decade. In the U.S., an unprecedented takeover binge occurred in 2005–2007 as private equity firms used leveraged loans (at the same time that subprime borrowers used No Income No Assets loans to buy houses) to finance numerous transactions…

The following sections are included:

• A More Complex Measure of Cash Flow

• Cash Through Different Eyes

• Shrinking the Cash Conversion Cycle

Working capital is an odd topic: few people express an interest in learning about it, and yet more companies go bankrupt due to a failure to manage working capital properly than due to almost any other cause. To most people, working capital is a mystery. It shouldn't be. Several chapters of Lead with Cash are devoted to working capital to correct this imbalance…

The following sections are included:

• Format of the Cash Flow Statement

• Reviewing the Cash Flow Statement

• Red Flag #1: Negative Net Cash Flow from Operating Activities

• Red Flag #2: Cash Flow from Operating Activities Less than Capital Expenditures

• Red Flag #3: Capital Expenditures Less than Depreciation

• Red Flag #4: Decreasing Capital Expenditures

• Red Flag #5: Declining or Eliminating Dividends

• Red Flag #6: Debt Repayment Exceeds Debt Proceeds

• What's the Story?

• Summary

The following sections are included:

• Measuring Cash Flow

• The Terminal Year

• The Discount Rate

• Avoiding Changing WACC over Time

• Conclusion

The following sections are included:

• Michael F. Gries and Michael P. Healy — Working Capital: How It Influences Cash Flow
  • Introduction
  • Overview of Working Capital and Its Components
    • Cash
    • Cash Equivalents (Marketable Securities)
    • Accounts Receivable
    • Inventory
  • Overview of the Cash Conversion Cycle
  • Net Working Capital
    • Accounts Payable
    • Accrued Expenses
  • Other Types of Working Capital
  • Accounting Profits vs. Cash Profits
  • Working Capital Management
  • Considerations When Making Working Capital Management Decisions
    • Cash Balances
    • Credit Terms and Discounts
    • Inventory Levels
  • Common Pitfalls of Companies
    • Failure to Properly Assess the Creditworthiness of Customers and Suppliers
    • Supplier and Customer Concentration
    • Discounting Receivables to Accelerate Cash Conversion
    • Lack of Asset and Liability Matching
    • Failure to Forecast and Adjust for Seasonality
    • Overengineering Cash Management Systems
  • Summary
  • Selected Additional References

• Barry L. Kasoff and Kenneth B. Furry — A Cash-based Approach to Better Business Information
  • The Nature of Cash
  • The Value of Cash-based Reconciliation
  • Turnarounds: A Bad Situation Made Worse
    • Crisis Scenario
    • Broken Communications
    • Cash Data and a Powerful Model
    • A Systematic Solution — Getting the Data
    • Building the Reconciliation
    • Model-based Analysis
    • Red Flags
    • Big Ramifications
    • Hard Conclusions
    • Impact on Profitability
    • Layers of Analysis
    • Foundation for a Turnaround — Good Data Means Better Communication
    • Creating a Cashbook and Accrual-Basis Statements
  • Putting First Things First
  • The Hard Way Is Often the Right Way

• Baker Smith, CTP — The Balance Sheet Made Me Do It: Killing the Company by Squeezing Cash

• Michael Chartock and Wendy Landon — The Importance of Cash Flow in the Retail Context
  • Five Indicators
    • Retailers Are Electing to Retain “Costly” Cash
    • Lack of Cash Usually Leads to Quick Liquidation
    • Cash Is the “Reason to Exist”
    • Cash Currently Is the Principal “Circuit Breaker”
    • Cash “War Chests” Are Built Heading into Bankruptcy
  • Conclusion

• Randall S. Eisenberg and Armen Emrikian — Prioritizing Liquidity During Difficult Times

• Howard Brod Brownstein, CTP — Manage for Cash

The following sections are included:

• Howard Brod Brownstein, CTP

• Michael Chartock

• Randall S. Eisenberg

• Kenneth B. Furry

• Michael F. Gries

• Michael P. Healy

• Julie H. Hertenstein

• Barry L. Kasoff

• Wendy Landon

• Marjorie B. Platt

• Baker Smith, CTP

The following sections are included:

• Index