Chapter 3
Controlling Cash

Let's say you've got a great company with solid revenues and reliable profits. Everything is just grand: you're paying all your bills on time, reinvesting in the business, and able to maintain a nice cash reserve. Then things get better. Years of hard work have netted you that one big customer. Bookings and shipments jump 30% and you're scrambling to ramp up. You've got that big surge of adrenaline going. You've finally hooked the white whale you've been chasing for years.

Your bank line of credit helps fund the business's growth as you're ramping up inventory purchases, adding payroll, enduring learning curves and high scrap rates, and adjusting to new equipment. It's all working as expected: the customer keeps consuming your product and ordering more. Fortunes surely await you at the end of this journey, as long as you can continue paying your bills. Then something happens: the new customer pays more slowly, an old customer withholds payment over a quality issue, a critical piece of equipment breaks.

Cash gets tight but you've got a great and growing business so you go see about a bridge loan or some temporary accommodation to help you get through this 60‐ to 90‐day cash shortfall. Your bank is cold to the idea and having second thoughts about what you've done with the money they already lent you. You've maxed out your lines of credit and your other assets are already collateralized. You and your business have taken on the smell of risk and the bank may just slow way down and watch you bleed out. Cash is running out and you're speeding toward a crossroad.

You're in a cash crisis! You're also in the zone of insolvency, which means that management's legal obligations just expanded from the benefit of shareholders and the company to include that of creditors. The zone of insolvency is a gray area, and it is called a zone because a troubled business will likely bump in and out of insolvency based on the formal definitions. Companies can be deemed insolvent in one of two ways: cash‐flow insolvency, in which the business lacks the ability to pay its obligations on time, or balance sheet insolvency, in which liabilities are greater than assets.

I point this out because it is a natural reaction of management to take corporate risks to save the business and continue its employment. Although creditors may maximally benefit from a sale or liquidation today, management will want to delay for months of last‐ditch efforts. Of course, that risk is how companies are saved, which allows the highest possible recovery, so the zone is a tricky dance of limiting legal exposures and doing what's best for creditors. Courts will look at when management saw the warning signs and acted appropriately. Boards are wise to contact a restructuring attorney or consultant early and carefully document how decisions were made in light of their fiduciary obligation to creditors.

You'll need to convert your financial management from a focus on gross profits to a focus on free cash flow. The first step you need to take is build out a 13‐week cash flow forecast because it is the tool by which you will manage your business for the foreseeable future. The 13‐week cash‐flow forecast tells you when and how you're going to run out of money, and then you must change the circumstances to avoid that fate. In the critical stages of a turnaround, it's a dynamic document that my chief financial officer and I will likely be updating and altering twice a day. Once the business has become predictable, we will do one big update weekly. The key is that the information is updated at least weekly and another week of forecast is added in the future. Although the standard is 13 weeks (one quarter of the year), the models often look out much deeper into the future, usually converting to monthly and quarterly snapshots out 12 months.

When a company is in distress, the consultants, bankers, lawyers, and accountants all immediately shift to the cash flow forecast to manage the business. However, the cash flow forecast model is rarely if ever even discussed in MBA programs. Despite that shortcoming, the 13‐week cash‐flow forecast is the number‐one tool of the insolvency, corporate revitalization, and bankruptcy industry (see Figure 3.1).

Generate Cash

So you're out of cash and if you're lucky, you'll be forced to fix your problems at their core. You want more cash like a drug addict wants drugs, but a huge pile of cash for you now would just enable more bad behavior. It's time to wake up early, drink a glass of raw eggs, and enforce healthy habits like a longshot Hollywood boxer (remember Rocky).

Like the 13‐week cash‐flow forecast, no one is taught to run a business on cash, and much of it is counterintuitive to what is taught in business school. Recently I was working with a highly competent controller and chief financial officer; both were CPAs and completely thrown off‐balance by the idea of managing the business for cash. They had worked mostly within large corporations and never had to worry about cash, so it was a learning experience. With practice, managing cash eventually feels natural. Not only is it critical to survival of the business, managing cash flow can become a fascinating puzzle that really teaches you the balance sheet.

The Four‐Legged Stool

A mentor once told me that a healthy and sustainable company must be equally balanced to the benefit of employees, customers, vendors, and ownership, and that when a company is distressed there is an imbalance. Likely, three of the four stakeholder groups have benefited unfairly and to the detriment of one. For most companies that I consult, if you look back over the prior three years, you'll find that the employees have been paid on time, in full, every week. You'll see that customers have received quality products and below‐market prices for a very long time, and that vendors who may now be stretched an extra month or two have enjoyed the past many years being paid on time and in full. But the business is losing money on a broken model and only one party is suffering the pain – namely, the owner and his personally guaranteed debt. The business has to be fixed and made profitable again, but things also need to be rebalanced. Employee accountability needs to increase, more competitive purchasing needs to take place, and prices should be increased. Although I discuss various tactics later, the balanced and healthy business structure is what we're really looking for.

30 Clever Ways to Generate Cash

The most critical skill in growing or fixing a business is the ability to generate cash. Everyone knows how to produce profits (push gross margins up or costs down) but controlling cash is not always the same. New sales with a long cash cycle may improve profits, but it's going to consume rather than generate cash early on. The same is true with any investment in inventory, equipment, or people. As you'll see, the suggestions that follow range from the banal to the extreme, with some defying every sensible business and financial convention in order to stay alive.

1. Raise prices. 100% of business owners agree, “I can't raise prices,” and they are 100% incorrect. Years ago I was working with a large regional trucking company and they knew exactly all the reasons they couldn't raise prices: it's a commodity, competitors are in and out of our customer's facility every day, the entire industry is cutting prices and that's the only way to keep business, and so on. Instead, we (mostly one of the owners) put together a brilliant plan to move prices up on customers one by one; we targeted what business we wanted to chase away and what business we had to keep. Net result was that billings increased 15% on similar volume.

   If you're in a cash crisis, you can raise prices today and make the increase retroactive to all open invoices. So, you have 30 days payables of $10 million and you just raised prices on past shipments 10%, you've got another $1 million coming your way. Yes, it greatly annoys your customers and you have no legal ground to do this, but this is about your survival not their good tidings. Let's be honest about what is happening here; you're sacrificing future business to preserve the present, and that's the risk you're taking. If you have a technically engineered product, like part of a car or airplane, it might take the customer six months to re‐source you and get the product made elsewhere, so the magic balancing formula is this: Can you extract enough cash today to still be in business three months from now, which will generate enough cash to fund a major retention campaign targeting your customer? I've both succeeded and failed with this approach, but it was the three‐month business results that determined my success or failure, not how deeply I sliced on the first day.

2. Collect faster. Speeding up collections is your easiest way to get available cash when you need it. You just change your credit terms for new customers and somehow tell all the existing ones that they need to pay faster. Start with your best customer; they are most likely to help. You can offer cash discounts to get paid faster but you shouldn't have to with most customers. Your 13‐week cash flow will help you make these decisions. If you're not in crisis, you can subtly work your way toward faster collections without worrying your customers. In crisis phase you do everything possible to shield your customers from your problems, but sometimes you can't fund the business without them. Industries with long program or platform lifecycles like aerospace, pharma and auto get very agitated when you exhibit financial weakness. At the same time, they will support you in a moment of crisis, if compelled. A big retailer is likely just to dump you and your products if you exhibit weakness.
3. Collect now. An even better way to generate cash and annoy customers is to ask for payment immediately. For example, “Shipments have been halted, all bills are due today and all future payment terms will be COD.” The business is going anaerobic (the body consumes itself for survival) and your bet is you can get things turned around fast enough to hold it all together. Part of this tactic is knowing your leverage. For example, if you make a tiny little part on a car, your failure to ship could stop an entire assembly line, which makes your survival very important and the auto makers will support you if needed (until they replace you). If you make and sell decorative pillows to gift shops, you have very little leverage, and your customers don't even have to acknowledge your new terms, let alone adhere to them.
4. Slow payables. Years ago a local bank called me to help out some wonderful and endearing entrepreneurs who were always struggling with cash. It seemed like once a month they would need a bank overadvance. The company had both an ambulance service and funeral home (yes, a vertically integrated business) and seemed to range between having +7 to –3 days of cash on hand at any given time. We methodically worked with vendors to extend payment terms one week, which increased our on‐hand cash range from +14 to +4 days. Faster collections got us another week (+21 to +11 days) and with no changes to the business they were now safely operating with a cash cushion and no longer upsetting their lender.

   A more radical approach occurred with a trucking company. Their bank declared it was time for liquidation and refused to fund any payments “until you can present us with a plan that the bank can support.” The trucking company hoarded cash and didn't pay anyone, and a week later it had been shut‐off from the bulk diesel market and it was receiving angry vendor calls, but it had accumulated $1,000,000 in cash. Now they had cash to work with and they had just swapped the insufferable pain caused by a hostile senior secured creditor for the annoying but relatively harmless pain of everyone else – and they had picked up a million dollars in the trade. They built from there, got everyone paid in full eventually and saved over 600 jobs in the process.

   My father always paid his vendors a few days early and took pride in wanting to be their best customer. For decades he told me that he was building good will when he could afford it, just in case he ever needed their help in bad times. When his turnaround happened, he got immediate 75‐day terms from his core vendors because he had built up that good will over many years.

5. Formalize procurement. This means issuing a memo that all purchases over $1,000 require a purchase order (PO), and all purchase orders over maybe $5,000 must have CEO approval. Invoices will not be paid unless they are supported by these purchase orders. Often in turnarounds, the accounting department is squeezing pennies while the purchasing department just keeps issuing POs. You can start by approving all purchases in the next 30 or 60 days then just raising the approval threshold as things settle down.
6. Sell equipment. If you have idle equipment, it's time to sell it. You're no longer in the capacity game, you're in the survival game. Call the auctioneer or post it on eBay and turn it into cash. If the bank has a lien on it, then talk to them and work out a deal where you can keep some of the money. When I have a current appraisal, I might be able to convince the bank to keep the forced liquidation value (FLV, also known as auction value) and let the company keep any premium above FLV. If nothing else, selling equipment makes the bank happy, pays down debt, and is symbolic of a company's commitment to making the business lean.
7. Sell inventory. When selling inventory, the first step is an inventory audit and categorization into four buckets:
   1. Old dead inventory.
   2. Old but active inventory.
   3. New, slow‐moving inventory.
   4. New, quick‐moving inventory.

   The old‐dead stuff hasn't moved in 12 or 18+ months. You're looking to identify inventory that no longer provides value to you. Use common sense; a critical spare part is not what we're looking to get rid of here. We just want old, dead inventory that can be gotten rid of in one of several ways: repurpose, refashion, fire sale, or scrap. You're going to take a dead item and extract cash from it very quickly. This will hurt your income statement and your (inflated) balance sheet, but maybe 10% of that loss will become positive cash in the business and it will feel like a great bargain to you.

   Repurposing might be converting a container of broom poles into flag poles or turning rolls of carpet into door mats. Refashioning might be repainting to a better color or swapping out the lampshades on a popular base. Fire selling is selling off a large volume at a steep discount to customers or liquidators and, of course, scrap is simply that; pennies on the dollar in recovery.

   One caveat to selling off inventory for a cash‐strapped company where there is an obstacle is when you have borrowed against it already. A typical manufacturing situation is that the company has a revolving line of credit which advances 85% on receivables and 50% on inventory. The company's borrowing base or head‐room expands as inventory values expand so there is a perverse incentive that allows inventory values to be “rounded up” over time. Scrapping $1 million of inventory for $100,000 in cash makes sense in a pinch but it will reduce your borrowing availability by $500,000 and likely exacerbate issues with your lender. This can all be worked through but you should secure lender support while you monetize the balance sheet.

   The “old but active” inventory just needs to be leaned out. Figure out what your near‐term need will be and move the rest to customers with discount programs or dump it to a discount retailer.

   The real‐value opportunity in inventory is through creative thinking and analysis. The next easiest target is slow‐moving younger inventory. This is stuff that's overstocked and will become old, dead inventory over time. You've got to lean this out and get it to turnover more quickly. Distributors do it all the time, offering specials on overstocks on old inventory.

   The next step involves a joint exercise between your marketing, inventory, and finance departments. SKUs are stock‐keeping units or individual inventory types; it's how we keep track of inventory, and product companies usually have too many. Do you really need to sell 31 flavors when 80% of your sales come from only 5 flavors? Couldn't you sell that same 80% with only 25 or even 20 flavors? The Pareto Principle (80/20 Rule) is universal, so just on math alone you should always be trimming some of your offerings. That excess is soaking up inventory dollars and also time and resources throughout your business. SKU rationalization is best done thoughtfully, but big, quick, instinctive changes usually work just fine.

8. Default on all debt. It's a prelude to any debt restructuring and it uses a company's money to fund its recovery. Now, every bank is different; some will drain you of cash through default rates of interest and fees like overdraft, forbearance fees, and a much larger loan‐modification fee. Other lenders will protect the business and allow what precious little cash they do have to be recirculated in the business. Either way, stop paying any of your debt and let your cash accumulate. You need to keep the cash in the business. This will likely get you moved to the workout department, but that's where you want to end up since these are the people authorized to discount and restructure debts. It's a risky move, so make sure you know what you're doing and anticipate your lender's next move. See Chapter 4 for more on dealing with your bank.

   A recent European client had a fast growing and profitable business that was largely wrapped up in the founder's ego. He accelerated his global expansion and decided to build a fancy new building (monument) as the company headquarters, both of which led to a severe cash drain. The banks balked at his aggressive plans and he was insulted. He felt it was a direct insult to him personally (it wasn't) and to his business acumen (it was). To show them what an honorable man of character he was, he took all his available cash and paid down the bank. “That should show them,” he said. “They question my ability to pay and I show them to their face that I can pay my bills!” “Yes,” I replied, “but now you're broke, the construction of your new building is stalled, your supply chain is backing up, and you're in crisis.” Had he held on to his money, taken a hit to his ego, annoyed the banks, and kept the supply chain intact, he'd have leverage and a healthier business. Instead, he gave away all his leverage and cash and now had nothing but his ego. PS: A fancy new headquarters building is almost always a bad idea.

9. Layoffs. The U.S. economy embraces the concepts of renewal and creative destruction. We have hope that every time a door closes, a new door will open and because of that, workers are free to leave jobs without future obligation and employers are free to cut jobs without future obligation. This means that in the United States you can often lay off people with minimal severance cost (see the WARN Act discussion in Chapter 6) so the cash benefit to the company is often immediate. In Mexico, Canada, and Europe, from what I've seen, severance is often 3 to 24 months' worth of wages, meaning that there is no cash return on investment (ROI) on layoffs and it's actually a cash drain on distressed businesses. So instead of saving the body with an amputation, the entire workforce stays employed, driving the insolvency deeper. When layoffs can generate cash, do them. Go deep and quick with your cuts, then focus on recovery with the survivors. It's far better to do one deep cut than several small middling ones that lack courage. Most beleaguered entrepreneurs later admit that the first layoff was actually easy and a good thing, they cut redundancies and a few bad actors. It's the second and third round of layoffs that really hurt. Consider reduced hours in lieu of a second or third round of layoffs. Some states like New York have workshare programs which allow employees to collect unemployment benefits for those days not worked. European companies often have similar programs and backfill those lost wages with social payments.
10. Reduce wages. In 2009 many companies cut employee wages to cut costs and generate cash. Properly motivated, most people will sacrifice for the common good. Now they must be motivated and need to feel that their common sacrifice really does benefit the common good because they have to go home and explain to their spouse why this pay cut makes sense and why they're willing to stick it out for the team.

    Nothing will create ill will faster than sending a valued employee home to explain his 10% wage cut only to come back and see the CEO acting like an entitled jerk. Mac, an entrepreneur, slashed wages and months later had his new $70,000 sauna delivered to the warehouse before having it delivered to his lake house in the company truck. Tim was so obtuse that he waited less than one month after slashing employee wages before he moved his racing Porsche into the warehouse for winter storage. One entrepreneur's wife made her sacrifice visible by moving from a Mercedes sedan to a Porsche 911. She told us twice of her sacrifice, as if we missed the point the first time. As an entrepreneur and a leader, you (and your family) are expected to suffer first and suffer most when times get tough. That means the first person to work extra hours, sacrifice vacations, and take the first pay cut is the CEO. We all know this intuitively, but it takes tremendous courage, and too often CEOs want to preserve their lifestyle at whatever cost others must endure.

11. Restart credit plans. If I'm attempting to restart a factory without any cash I can go to the vendors (who are all owed a bunch of money by the prior owner) and convince them to fund our restart. It's in their best interest to save a customer and improve their odds of recovery on old debt. My pitch is that I need to freeze all past‐due balances immediately and I also need 90‐day credit terms and an open credit limit, because I'm ready to order a bunch of material to restart the factory. Let's say my factory ships $10 million per month with a 40% material cost, and I'm looking for 90 days of restart credit. That's $4 million in material purchases monthly, so I'm seeking $12 million total credit.

    This is the intellectual riddle I love so much about turnarounds, I'm trying to restart a factory and put 500 people to work, but I've got the world's worst poker hand. The balance sheet is shot, the company stalled out, the supply chain is locked up, lawsuits are everywhere, employees are vanishing, and so are customers – but I think we can put the company back on track again, with none of our own cash. The first thing we need is leverage; I get the senior secured lender to let me produce the backlog in exchange for some debt reduction to them. Then I stop everyone in their tracks with the announcement that the bank will support the restart if, and only if, the stakeholder parties support and work within the confines of our plan. With bank support, everyone now wants to talk and hear our plan. Knowing the vendors are upset and unlikely to unanimously support my $12 million credit plan, our attorney crafts a special debt treatment where participating vendors are granted an improved position in the debt stack. Vendors then self‐select whether they will keep us as a customer and recover old debts through an improved position or will they opt to lose a customer and come up short in recovery? The vendors who choose to be supportive get our devotion and are a priority repayment. Now we have a plan that makes sense, has multiple leverage points, and is likely to be supported.

    No doubt these restart credit plans are tough coalitions to build and hold, but you are doing virtuous work, so despite the odds, good fortune is on your side.

12. Vendor negotiations. Over the years I've personally negotiated with thousands of vendors and every single conversation starts with the vendor saying something like; “You're cut off until we get paid,” which is reasonable but misses the point. What they really want is security of payment and continued profits. I respond with something along the lines of the following:

    I will get you paid but let's review for a minute. From my calculations you have made 10 to 20 times that amount in gross profits on our business over the years, so your risk is either a small haircut or you can recoup that amount plus another 10 to 20 times into the future. I'm being totally upfront with you, we have a 90‐day cash need and we are reevaluating our entire supply chain. Future vendors are being selected based on their willingness to help us through this need. If you commit to 90‐day terms now, you will be our future vendor and we will repay your help with profits and loyalty. If not, I am forced to shop the business elsewhere.

    If we need to pay cash to someone else for an order or two, just to make Supplier 1 panic, we will. Again, we're creating leverage from thin air.

    The next level of vendor negotiations leans on psychological tactics such as the following:

    • Fear of missing out. Our vendors stay with us for years and decades, so are you willing to be locked out of this company for 10 years based on 90 days of credit? Does the vice president of sales support that decision?
    • Fear of nonconformance. You are the only one who is acting in this extreme and punitive manner. Everyone else wants to support and share in our future success. Even the governor of the state has publicly supported our plan – but you are fighting it. What is motivating you to act this way?
    • Fear of employment 1. Perhaps it's better not to take the risk of being hung with this decision, maybe we should talk to your boss?
    • Fear of employment 2. Are you authorized to write down debt for the corporation? Are you authorized to turn down 10 years of future business? When this call ends I will send a letter to your president either praising you or detailing what I feel is your myopic point of view. Before you do yourself any harm, why don't you just pass me on to your boss?

    If you can't get even 30 days out of the gate, propose an expanding payment term arrangement:

    • On delivery for first one or two orders
    • 15 days for the next order
    • 30 days thereafter
13. Debt for credit swaps. Occasionally there is a recalcitrant vendor who is irreplaceable and has absolute leverage over your business. If they support you the business will survive. If not, it won't. They can afford the 90‐day terms but they want to extract more money in the deal. I've been forced to sweeten the offer with long‐term debt on our balance sheet in exchange for near‐term credit. When you are out of options, it seems reasonable to accrue a 10% premium on all purchases for a year with a long‐term payback schedule.

    For example, let's say I need to order $100,000 from you monthly and I need 90‐day payment terms to fund my restart. This means I need $300,000 in vendor credit from you (3 months of $100,000 per month). To compensate you for this extension of credit, I will pay you on time at the 90 days and will also accrue an extra 10% premium on my purchases. This accrued balance will sit on my balance sheet as long‐term debt. So, every month I order $100,000 in product from you and I accrue 10% of that purchase (10% of $100,000 monthly = $10,000/month = $120,000/year). This premium payment incentivizes you to support us with healthy credit terms during our first year back in business. It's a great deal for you; at the end of one year, you'll have sold $1.2 million of product to a devoted customer. You'll also have earned an additional $120,000 for the extension of $300,000 in payment terms.

    For you, the entrepreneur, it's a lousy deal, because you're paying full price plus a 10% premium. The benefit is it helps us build cash flow of the business. We are paying $120,000 (slowly, over time) to borrow $300,000 today, which allows us to revive a business with little of our own cash. It is an unsecured liability that participates in the risk of the business. We can also raise our prices to recoup this expense.

    In really tough situations, I've been forced to accept 100% of my request in new long‐term debts. That's in addition to the old debts that are already owed. So let's say, using the same example as previously, that I request 90 days, which is $300,000 in vendor credit, and you are such a heartless bastard that you force me to immediately sign an additional $300,000 note for security and your long‐term (unscrupulous) profits. Yes, I paid that once. Without regrets.

14. Debt for equity. Similar to point 13, we're selling our plan for the future in exchange for our stakeholders' financial support, and if we do a great job it's only natural for them to want an actual stake in our future success. So, for $300,000 in trade credit to the right vendor, I might be willing to offer $300,000 in future‐value equity. The key here is future value. Maybe you pick three years out, do your projections, and figure out what percentage of ownership now might be worth $300,000 then. If they provide critical support and you hit your numbers, why not? Only an entrepreneurial vendor/partner will take you up on this, and they could be a huge help to you in many ways over the years.

    Many business owners are hung up on retaining 100% equity, but I'm not so much. I'd rather have more partners across more businesses than all my eggs in one isolated basket. Others are, understandably, hung up on maintaining majority control, but I've loosened on that opinion over the years because I've better understood the protections good corporate governance can offer minority shareholders.

15. Factoring. Factoring is a way to quickly leverage a business's accounts receivable. Most turnarounds I'm brought into have already leveraged accounts receivable to the hilt, so factoring offers no additional benefit. But, in a buyout or acquisition, it works wonders. Factoring is also quick and can often be put in place within two weeks, whereas a finance company asset‐based line of credit (ABL LOC) might take four weeks, and a bank will be two months or a quick refusal.

    There are two types of factoring: (1) recourse, where if the customer doesn't pay the invoice, the factor can come back to you for the money. (2) Nonrecourse where the factor “buys” the receivable from you and it's 100% their responsibility to collect.

16. Purchase order financing. This works great for importers who deal in finished goods that can be easily liquidated. If we get a purchase order (PO, a binding contract that entices me to spend money producing their product for specified payment) from a big national retailer that I'm going to have produced in China and delivered to the customer in the United States, then I can likely finance the whole order using PO financing. I'll take my PO to a PO financer who will issue me a term sheet describing how they will take ownership of the finished product at the port in China and hold ownership of the product on its voyage across the ocean. The Chinese manufacturer feels secure because they'll be paid in full at the port. The lender feels secure because they will control the product (which has a binding PO) during the entire length of their involvement. As an entrepreneur, I love it because no cash ever came out of my pocket to fund the order but I still control the largest portion of proceeds from the sale.

    For the most part, PO financing only works with finished goods (which can be seized and quickly liquidated by the lender) and does not work for products that transition from raw materials to finished goods under your ownership (as in your factory). It is very hard to find a lender who will PO finance orders produced in a U.S. factory for delivery to a customer within the United States. The explanation is that, if something goes wrong, the PO lender can't come into my factory and recover their money from a pile of half‐built parts. But if something goes wrong on an import order, they just divert the container to the customer or a liquidator.

17. Pre‐invoice UCC filing. I've used this clever method to fund a domestic factory order when PO financing couldn't. We went to the manufacturer and showed it both our PO from a national retailer along with our proforma invoice that we would present to the retailer when shipment was made against the PO. We then filled out a Uniform Commercial Code UCC‐1 lien for the producer, giving the producer a lien on our future invoice, which would guarantee the producer payment from the retailer. If distrust or distress is high, an escrow agent can be used to receive and disburse funds from the retailer. Lenders often issue comfort letters to provide assurances that obligations will be met. Since the lender is usually controlling cash at this point, the lender can promise to segregate that invoice payment and remit it to the supplier. This induces the supplier to help and provides comfort and explanation to the supplier's own bank.

    Let me illustrate how this works; we receive a $1 million purchase order from Big Box Retailer that has a 40% gross profit margin for us (I will spend $600,000 to have it produced and will keep $400,000 in gross profit for my part as designer, broker, and salesman) and 30‐day payment terms. I show my vendor (the factory owner who doesn't have a relationship with my customer) both the customer's PO and my proforma invoice. Then we both fill out the UCC‐1 and the vendor files it with the Secretary of State or at the courthouse. The factory owner now has a priority legal claim of $600,000 on my $1 million invoice. With that security, he buys materials, assembles labor, and produces the goods. He then ships to the retailer and waits 30 days for payment. Big Box Retailer receives the goods along with my invoice. As obligated, Big Box Retailer pays the invoice in full 30 days after receipt. We split the proceeds as agreed, I get $400,000 and the factory owner gets $600,000. We all win through the magic of creative finance; the retailer got the product it wanted, the factory got the order it wanted, and I made my share, all with no financial exposure.

18. Vendors place inventory on consignment. In this situation we get the vendors to place their inventory on our shelves, but they maintain ownership interest. This way we (the customer) have stocked shelves but the vendor maintains title over the goods as opposed to selling the product on open‐payment terms and being way down in the general unsecured creditor stack. When the product is sold, the vendor receives payment and releases title to the goods. The recent Sports Authority bankruptcy case has changed this long‐standing method, because secured creditors have been able to claim title to the consigned goods.
19. Vendor sells inventory on terms and files a UCC lien against that inventory until they are paid. Here the vendor delivers goods and files a UCC lien against those specific inventory assets. This works when there are no prior inventory liens (unlikely) or when the secured creditor allows the vendor first position on those inventory assets, which might happen if the items are of critical importance to the turnaround plan.
20. Vendor holds a dated check. We ask the vendor to let us pay by check, but they hold the check for X days. (It is a crime and personal liability to send a bad check in the United States, so that's their assurance that we are not playing games). Sometimes a series of dated checks will provide comfort to a vendor.
21. Cash from your customers.

    “You're going to shut down the (Big 3 auto) factory!” screamed the buyer.

    “Yeah, I know,” I responded calmly.

    “You know! You're going to know very well because the penalty is $250,000 per hour if we're line‐down,” he screamed. No kidding, the penalties really are that steep.

    “I know, that's a lot of money. I bet it could cost even more than that.”

    “You're damn right it's more than that, it's going to cost you a fortune – so what are you going to do about it?”

    “Well, there's just not much I can do about it, we're out of money.”

    [Long and Awkward Silence]

    “Well, how much do you need?” was his pained response.

    At the end of our pleasant conversation I had the cash I needed to get our factory moving again.

22. Cash value of life insurance. Life insurance is often one of an entrepreneur's smartest investments. The money can go in pretax and protects the company (and heirs) from the sudden loss of its founder or a key person. This is called “key‐man” life insurance and your bank wants you to have it. So you take out a large key‐man whole life insurance policy, fund it from the company and build up a significant cash value. The investment may be considered an exempt asset and protected in bankruptcy. Additionally, life insurance expense is often buried in the income statement amidst all the other corporate insurance expenses so it's never obvious how much you're socking away from the company for your benefit. In a turnaround, you can either just keep quiet about your large and protected cash balance (and keep funding it) or you can borrow or use that cash balance to help fund the company turnaround.  Consult a lawyer.
23. Subleasing parts of your business. This is the famous Arnold Goldstein example of the restaurant owner who leased out the valet parking concession to a private company. So the valet company paid the restaurant for the privilege of operating at his location. Another example was a distributor of consumer goods who found someone that would pay rent and buy broken cases of products to run an off‐price store out of the back corner of their warehouse. Now the distributor is getting rental income and full recovery on damaged inventory.
24. Sale leaseback. This works well with large assets like a building or a big piece of equipment. Let's say you own your factory, which is appraised for $10 million, but your business is cash poor. To rectify the imbalance, you can sell your building to an investor and at the same time lock in a long‐term (say 20 years) lease on the building. This puts $10 million of cash (minus debts, fees, and taxes) in your pocket but increases your monthly breakeven by the amount of the lease. You're losing the value of a real estate investment, but potentially funding the turnaround of your company.
25. S t r e t c h payments. When cash is tight, wait until you get the shutoff notice from your utility companies. They don't have much wiggle room, so be open with them and always get the check there before they mobilize the trucks. I have clients who have existed in this perilous state for years on end. Insurances also have hard cut‐offs that you can stretch up against. Taxes may also be stretchable, but I never play games with Caesar.
26. Accelerated tax returns. One client took his business from zero to $45 million in five years, then back to zero in the next five years. On his way up, he was paying taxes on earnings of over $10 million annually; on his way down he was losing millions annually. A big income loss on the heels of big gains can create a future tax refund. Somehow, there was a temporary filing loophole and he got his local congressman to walk his tax return through the IRS, which netted an expedited $1.5 million tax refund, about six months faster and with no audit. By the time Uncle Sam wanted his money back, the cash and the business were both long gone. The IRS has since closed that loophole.
27. Beware unaccrued liabilities. Warranty claims, gift certificates, customer deposits, equipment repairs, insurance renewals, taxes, permits, and fees can all sneak up on you. Think through every single thing and get it on your cash‐flow forecast.
28. Delay and stall collections. See Chapter 8, “Debt Restructuring Out of Court.” There are myriad tactics that I cover in Chapter 8, but the most important concept is the priority‐of‐debt rule; if the bank and government are not being paid in full then no vendor debt should be paid at all. That's an oversimplification on my part, but it explains the general theory we are working under. Don't give collectors empty promises or apologies; just explain the situation and how their claims will be handled.
29. Never, ever, ever skip tax withholdings. Ever! See Chapter 6, “Arsonists and Regulators.” Trustees and trust accounts are held to the very highest legal and fiduciary standards. The safest thing you can do is automate the collection and remittance process with your payroll firm – out of arm's reach.
30. Move the cash. If your bank is hostile and you fear they will sweep all your cash, then you have to protect the business and your cash. The first time I did this, the bank swept our account that night, wondering what happened to the $200,000 that had been there just hours before. It was hysterical that next morning when the bank freaked out, but really scary when we were doing it. Nothing will move a bank into attack mode faster than moving your (their) money to another bank. It's a dicey move. You're protecting yourself but realize that it's gloves off in the morning.

    The best way I've found to balance this risk is to move the money away from the bank but to a place that's less offensive than another bank. In one situation, we moved hundreds of thousands of dollars out by prefunding payroll. We moved the money to our payroll service and explained “we feel secure having a month of payroll prepaid in case of a shutdown (oblique threat) and, quite frankly, we weren't sure we could trust you not to sweep it.” Prepaying other utility‐type expenses, like the electric bill or insurance, are also somewhat tolerable to the bank. In my experience, they usually only come for the money once and a successful (noninflammatory) block will put you in a good position to negotiate cash application on more favorable terms.