Are You "Buying" Sales? --Dickeson

When the editor in the June issue of Business 2.0 wanted to seek out the 10 most successful electronic firms, he or she selected cash as the primary criterion. "...Cash flow is much more difficult to fake with accounting tricks, but also because the ability to generate cash is ultimately the key to any company's prosperity. . ."

Still, in a recent survey, we read that accounts receivable are more than 50 days old for 90-plus commercial printing firms. Is this the typical cash realization from printing? Yes, I think it is. Does it mean that commercial printing companies place less value on cash as a key to their prosperity? No, I think not.

What this means is that the firms in the survey had to give extended credit in order to get sales. They had to "buy" sales for their company to have business. Agree? It's doubtful if those entrepreneurs recognized this truth because cash flow is not a prime reporting factor. We throw a dust cover over this elephant in our living room and ignore it.

Find Your Cost Reports

Where is it in our cost accounting reports? I challenge you to find it in your fanciest job cost system. It isn't there because cost accounting has nothing at all to do with cash. Job cost accounting is based on Budgeted Hourly Rates—not on cash flow. (By now, we concede the inaccuracy of "rates" based on budgeted figures as predictors.)

Is the "Days of Outstanding Sales" in the Income Statements or the Balance Sheets we get each month or quarter—our General Ledger Accounting? Again, I challenge you to find it. You won't. Sometimes you'll find a statement called "Source and Application of Funds" in those reports—if you can figure out that report! Yes, you'll find "profit or loss" for a period, but that tells you nothing about cash—your key to prosperity.

You may find some figure labeled "EBITDA," which means Earnings Before Income Taxes, Depreciation and Amortization. Is that cash in or cash out? Neither. It would come closer to meaning something if it was EBDA—Earnings Before Depreciation and Amortization.

Depreciation and Amortization aren't cash charges at all. You must deduct lease rents and taxes paid or refunded to know where you stand on cash. It would also have a lot more meaning if "Earnings" meant "Cash Collected" in place of receivables accumulated. That's what the editor meant when he/she said cash is more difficult to fake and is the ultimate test of prosperity.

Is it any wonder, then, that we don't keep track of cash—our ultimate key to prosperity? It simply isn't included in the reports we get from our computerized systems. We don't predict cash. We don't track cash. Yet generating a healthy cash flow is what the printing business is all about.

But learning the number of days it takes to collect receivables isn't the only answer to our lax attention to cash. We don't know how long it's taking our accountant to issue an invoice after the job is finished—while it's in finished goods inventory. Again, I raise my challenges. You won't find it in any reporting system you now have.

What's the average time between finishing a job and converting it to an account receivable? While it's dallying around in finished goods purgatory it isn't on the way to becoming cash. How long does it take in your company? Seven days? Fourteen? Longer? Shorter? Do you know? You don't? Better find out right now. It's a measure of your ultimate prosperity and you can't fake it.

I know. Can't get the invoice out until the job cost report is complete with all the extra charges. Baloney!

And then there are the days, weeks or months of cash sitting around in raw materials inventory—waiting—just waiting around for a job to come along. How many days of cash do you have tied up in raw materials? Don't look in any report. It isn't there. Should be, but it isn't.

See what I mean? We ought to be watching cash, our ultimate measure of prosperity, like hawks watching for road-kill. But, we aren't. You add up the days in raw materials, work-in-process, finished goods and receivables, and you're in for shock and awe. That's where the money is. Can't fake it.

A Trucking Challenge

Take 500 bucks and buy a load of cantaloupes and truck it from Houston to Des Moines and make a net 3 percent cash. Fine. Do that a dozen times and you've made 36 percent on your working cash. But, in printing, you only turn that cash three or four times in a year. Should we get out of printing and go to trucking cantaloupes? Not an option. We must move printing from a turn of three times a year to nine or 12. Now we're talking real money.

Oh, I haven't mentioned the days in production, have I? It's called work-in-process. Generally, it has the least time attributable to it compared to raw materials, finished goods and receivables. But golly-whiz, we do watch that process time, don't we?

Raise Holy Ned if it runs three hours over standard allowance. How come we didn't raise a fuss when purchasing bought that bargain paper that sat around for weeks, or when accounting took 14 days to get out an invoice, or some account ran 70 days past due?

It's because we don't report days in raw materials, finished goods or receivables, isn't it? And we do report "hours" in the production process, don't we? (And we make up phony budgeted hourly cost rates to value them.) We don't report data that we should and we do report data in utmost detail that's relatively unimportant.

Unbelievable.

—Roger V. Dickeson

About the Author

Roger Dickeson is a printing productivity consultant based in Sylmar, CA. He can be reached via e-mail: rogervd@verizon.net.