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1 Page 1 of 5 TELL A FRIEND Thursday, March 25, 2010 News from FBMA VOLUME 1 ISSUE 6 HOME CONTENTS Random Thoughts Breaking News in the Construction Industry FBMA Texas Hold-em & Golf Tournaments Moved to Leesburg, Florida The CEO as Chief Working Capital Officer CWCO by Robert L. Turner, Managing Director of Management Services & Associates Building products firms enjoyed unprecedented cash flow growth during a decade of economic expansion through The world has changed. The U.S. is now twenty eight months into the longest and deepest economic crisis in 80 years. CEO s who engineered survival strategies, now seek working capital required to finance the inevitable economic upswing. This article provides six steps to generate working capital, by launching a mindset shift toward the CEO becoming the Chief Cash Working Capital Officer CWCO. News from Florida's Capitol PLM, FBMA's Major Education Sponsor First Aid Training Next Up in Hard Hat Safe-T-Zone Series Advertise in e- Blueprint Today! Volunteering with FBMA Dixie Plywood & Lumber Company Hosts Next Fundamental Tools Workshop FBMA Recognizes 2010 Sponsors LETTERS There are no letters for this Economy of the Future: New Normal Notable firms including GM, Masonite, Bear Sterns, Wachovia, AIG, and Building Materials Holding Corp failed or restructured. Some 140 banks failed in 2009, 26 closed in the first three months of 2010, and 522 are on the FDIC s watch list. Institutional Risk Analytic s September 2009 study projects 1,000 will fail. The Credit Research Foundation s recent survey of 1,027 businesses indicates 90% have working capital strain, and 54% have shifted focus from sales to cash flow and liquidity. The media continues to publish articles highlighting banking system s fragility, including the Wall Street Journal s February 24, 2010 article Lending Falls at an Epic Pace; CNN Money s October 20, 2009 article Top Banks Cut Small Business Lending; and the South Florida Business Journal s January 25, 2010 piece, FDIC Chief Expects 2010 Bank Failures to Exceed Is it time to think outside the bank? What is next? McKinsey Consulting s September 2009 survey of 1,600 CEO s revealed many are managing toward the new normal economy, with less growth, more uncertainty, and the need for nimble strategies. Building products firms must have a sharpened focus on working capital and liquidity.

2 Page 2 of 5 article. To post your own letter, click Post Letter. [POST LETTER] Building Products: Preparing for the Roller Coaster s Third Turn The building products industry has declined steadily since annualized housing starts peaked at 2.2 million in January Areas in Florida and California have experienced a 90% declines in housing starts from the peak, to the trough. The industry s roller coaster ride decelerated at Turn 1 in the third quarter of 2008 with financial market turmoil and GDP growth plummeting from +3%, to - 6%, and a business failure epidemic; Turn 2 in 2009 continues as firms hold on for survival and the market searches for the bottom; and Turn 3 will begin as the market turns upward. Building products faces a different challenge at Turn 3, one of finding working capital to finance growth driven by long term housing demographics, in a very difficult banking climate. The Squeeze - Big Business Manages for Cash CFO Magazine s 2009 Working Capital Scorecard indicated the 1,000 largest public companies in the US liberated $62.7 billion in cash from their balance sheets in How? Largely by collecting receivables faster, shrinking inventories, and stretching payables. GE freed up $3.8 billion in cash using these concepts in the second quarter of Conversely, the August 2009 Wall Street Journal article, Big Firms are Quick to Collect, Slow to Pay indicates smaller firms are not faring as well. The cash crunch is real. CEO s face daily sales, operations, employee, and financial challenges. Cash is the fuel required to operate a business. Without it, the business stops. How can a busy CEO focus on cash? Step 1: Shift Priorities to Financial Concepts A dizzying multitude of books and consultants bombard executives with magical solutions for improving working capital. There are no silver bullets. Avoid costly distractions. There is no substitute for a disciplined effort to execute a few basic concepts. How and where should you focus on financial priorities? Use the simple I.D. &A. approach: Inside the company; Down the financial statements; and Across the order-to-cash cycle. By focusing inside the company first, and outside the bank, firms will generate cash rather than relying on bank loans. Concentrate on what you control. This is a no regret approach. Companies either generate sufficient cash, or become a better candidate for subsequent bank financing.

3 Page 3 of 5 Identify Highest Priority Working Capital Opportunities Step 2: Think of the 80/20 rule. Which 20% of items provide 80% of the opportunity? Look down the balance sheet to prioritize larger items providing the greatest cash opportunities. Receivables, inventory, and payables are obvious liquidity targets. Step 3: Look down the income statement to identify profit margin or cost improvements Step 4: Use the statement of cash flows to understand working capital requirements by reconciling net income to net cash. This is an important and grossly underutilized tool. Building Products is a Working Capital Intensive Business Step 5: Look across the order to cash cycle to tighten process gaps. Our financial benchmarking analysis of building products businesses with $100 million annual revenue illustrates challenges. The order to cash cycle averages 75 to 90 days and consumes $ $25.0 million of working capital. Every day (about 1%) of cycle time improvement equals $278,000 cash. This cycle averages 45 days to purchase, deliver and bill the customer, and 37 days to collect receivables. What causes this? Building products transactions require many linkages and processes within and outside a company. The opportunity for improvement is significant, as only a 1 day, approximately 1%, improvement frees up $278,000 in cash in this example. A few simple improvements will be worthwhile. Accounts Receivable: A Large, Closest to Cash, and Critical Liquidity Lever Invoice it and they will pay? During economic boom years collection of receivables was a near certain afterthought. Like the economy, this has changed. The Credit Research Foundation s 2009 survey, Economic Impact of the Credit Crisis on Business Credit & A/R indicates 58% of 1,027 firms have shifted priorities from sales, to accelerating cash flow and collections. Receivables can represent up to 40% of assets and half of the 75 to 90 day order to cash cycle. Waiting days for payment is bad enough, but the additional risk of non-payment, excessive collection efforts, and a bad debt write offs is frightening. Receivables represent a critical subset of the order to cash cycle, known as the Credit to Cash Cycle.

4 Page 4 of 5 Credit-to-Cash Cycle Improvement Back to the Basics 1. Measure accounts receivable performance. Track Days Sales Outstanding DSO, calculated as: DSO = (Month end A/R $ / Sales $) times the number of days in period. 2. Perform pro-active credit scoring analysis before making sales calls to new customers, or extending credit. Cost effective electronic business intelligence will improve sales and profitability. 3. Re-evaluate terms of sale. Consider attractive tradeoffs of providing a cash discount for accelerated payment, at a lower rate than your cost to finance delayed receivables. 4. Establish credit and collections policies. If payment isn t achieved within a set time, don t procrastinate. Place the account with a trusted third party collections firm. 5. Receivables are an immediate source of cash. Receivables may be factored quickly, easily, and without adding debt or the personal guarantees a bank requires. 6. Profit recovery. Explore the sale of receivables previously charged-off to bad debts. Few firms consider this, but it can be found money. 7. Time is money. Your time is valuable. Seek help. Many firms do not have the staff, technology, or expertise to effectively manage receivables. Engage the services of a reputable firm to provide quality expertise, freeing your time to manage the business. Step 6: Measure Working Capital to Drive Improvements Days of Sales in Working Capital ( DWC ) is a simple alternative to the more detailed order to cash cycle metrics. The DWC formula = (AR $ + Inventory $ - AP $) / (Annual sales $ / 365 days). Begin by calculating DWC trends and setting improvement targets. CFO Magazine s 2009 Working Capital Scorecard, indicates the comparable Building Products Industry Group performed better with a median DWC of 50 days. Construction Materials and Distributors groups were at 70 and 60 days respectively. How does your business compare? Summary Six Steps to Generating Working Capital and Becoming the CWCO Make the mindset shift toward becoming the Chief

5 Page 5 of 5 Working Capital Officer CWCO by utilizing the I.D. &A. concepts of inside the company, down the financial statements, and across the order-to-cash cycle. Emphasize internally generated liquidity solutions, rather than bank financing to fix problems; Two, look down the balance sheet to prioritize the biggest buckets of opportunity. Receivables are the most important liquid asset. Consider engaging a professional receivables management firm, factoring, or an advisory board to expedite progress. Inventory consumes cash, manage it.; Third, look down the income statement to aggressively manage larger controllable costs; Four, utilize the statement of cash flows to quantify working capital requirements; Five, tighten order-to-cash cycle process gaps to compress cycle time and capital; and Six, use the DWC metric to track and improve liquidity. Robert L. Turner is a long time building materials industry executive. He is Managing Director of Management Services & Associates, LLC ( MSA ), which provides middle market firms with a variety of liquidity solutions focused on generating cash without adding debt or overhead expense. He may be contacted at bobturner@msallcsite.com Created with enewsbuilder [PRINTER FRIENDLY VERSION]