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How to get through the off-season without cash gaps

In the spring and summer, the company had strong sales, and in late autumn, winter and early spring it had to take out loans and overdrafts. They figured out how to fix it, and in just three months they assembled an airbag for six months.

Our hero company is a manufacturing and construction business. Demand directly depends on the work of construction sites, therefore, as soon as they start active work, the company starts earning. And when the construction site freezes, the company takes loans and credits. This went on for 7 years – during the idle period, the company took loans, and then in the season paid them and interest.

Over time, the equipment began to become outdated, and the costs of maintaining and updating them were added to the loans – and then it became very difficult. The company began to eat itself up. As a result, it seems that everyone is working, work goes on during the season, but in the end the situation is critical.

And now, the next off-season was approaching: October 2020 – March 2021. We could once again get out with the help of a loan, but decided to try to figure it out on our own. I think you already figured out what we did. How exactly – now we will tell you.

We changed the numbers in this case because of confidentiality. But the situation, the logic of actions and management decisions are real.

Stage 0. Analyzed reports
When the owner came to us, the first thing we did was to see how the business was doing. To do this, we collected detailed reporting for 2019-2020. What we saw was encouraging: the company earns enough during the season to live off the season at its own expense.

That is why there was still not enough money ↓

1. We spend a lot on dividends. During the high season, the company was bathed in money, so the owner took out large enough sums for himself. This made itself felt later: in the off-season he did not receive dividends at all, moreover, sometimes he “sponsored” the company with money withdrawn in good times.

Click to enlarge

Dividend withdrawn schedule. As they say in Russian folklore: sometimes empty, sometimes thick. Only here it is the other way around: at first it is thick, then empty.

2. Big money brings high-margin products, but we sell few of them. The business has two directions, and one is more marginal than the other: 56% versus 37%. It is more profitable to focus on the first – the sale of building materials to small companies and construction individual entrepreneurs. We set a plan for salespeople to sell more products to this particular segment.

3. Costs jump. This suggests that we do not control them. And if there is no control, then it is likely that we are spending too much. During the high season, this is imperceptible – there is money – but it can come back to haunt when there are problems with money.

4. The business is not over-credited and can make money. This helped us figure out the balance sheet. When we brought him together, we saw:

in the block of assets, the largest part is occupied by non-current assets – equipment, cars, buildings and structures. This is normal for a manufacturing facility.

in the capital block, we saw that the business had accumulated – all its profits. It turned out that things are not so bad here either.

in the block of obligations, we looked at what the company owes and to whom. At this stage, we compared capital and debts and found out who owns the company – ourselves or creditors. It turned out that the company belongs to itself, and in order to say goodbye to debt and become strong and independent, it just needs to tighten its belts and act according to a clear plan.

Bottom line: we sell marginal products, get rid of unnecessary expenses, save money → use them in the off-season. Sounds like a plan! Let’s implement.

Stage 1. Cost control
With a few months left until the end of the season, the company was doing great. In order to also happily enter the off-season, we have introduced strict financial discipline. Such a measure was supposed to help save money and not waste it.

Dividend payments. Previously, the owner of the business would withdraw dividends every month. We decided that we will recognize net profit and pay dividends based on the results of the year after the off-season. The following scheme was taken as the basic one:

We work during the season → We keep off the season → We look at how much net profit we have eaten → Divide the remaining profit into target expenses and dividends

Fixed dates for payment of bills. Previously, bills were paid as they were received, no matter what period they were in. They also did not take into account whether large payments are planned in the near future. This led to cash gaps. In order to redistribute the financial burden, we decided that we approve payments on Thursdays, and we make them on Fridays. Everything is clear and there is no chaos in the documentation.
Reduced costs. The production took at least 400,000 rubles every month. We decided to work on this amount – to track where literally every ruble goes. Found items on which you can not spend so much. For example, gloves and tools were purchased on a monthly basis, but a rigorous inventory showed that this could be done quarterly. We analyzed the life cycle of each consumable and found out what you can save and not buy them every month.

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