FGIA Webinar Provides Financial Tips Amid COVID-19 Crisis: Part 2June 3rd, 2020 by Jordan Scott
The COVID-19 pandemic has had a major impact on the economy and many glass and glazing companies are looking for ways to strengthen their businesses during this time. To address this issue, the Fenestration & Glazing Industry Alliance (FGIA) hosted a webinar titled, “Financial Management and Value Preservation in a COVID Economy,” with presenter Michael Collins, partner and managing director of Building Industry Advisors LLC.
Collins emphasized the importance of improving a company’s net working capital (NWC) position. NWC is a company’s current assets minus its current liabilities. He explained that cash usually is removed from NWC in a sales transaction but that in this situation, cash is the most vital element of NWC. The goal is to decrease the capital tied up in inventory and accounts receivable (A/R) and increase the portion of NWC held as cash.
“During periods of strong performance, NWC is often an under-managed asset,” said Collins. “Throwing money at a problem is easy and tempting when times are good but when cash is tight companies lose out on early pay discounts. When the need to more carefully manage the NWC investment in a business becomes more acute, companies may be able to decrease NWC by as much as 30%.”
Some of the key performance indicators (KPIs) for NWC include:
Days sales outstanding: Total A/R for a given period divided by the total net credit sales for that period (non-cash sales). The target is 43-46 days.
Days payables outstanding: Average accounts payable (A/P) divided by cost of goods sold (COGS) multiplied by the number of days in the period. The target is around 45 days, stretching up toward 60 days if suppliers are trying to support a company.
Days inventory outstanding: Average inventory divided by COGS multiplied by the number of days in the period. For fast moving, commodity inventory the target is 30-33 days (or 11-12 inventory turnovers). For slower moving but well managed inventory the target is 90-100 days (or 3-4 inventory turnovers).
“If you are not tracking these key pulse points, it will not be possible to test policy changes or confirm improvements to your utilization of NWC,” said Collins.
He added that decreasing inventory is an excellent way to free up cash currently tied up in NWC. However, not all inventory drawdowns are created equal. The best items to reduce, according to Collins, include commodity items and items not directly observed by customers that are available from multiple suppliers a close distance from a company’s plant. Safety stock items include those where one supplier is highly preferred, those that are customized or made to order and those with long or highly variable lead times.
To improve the collect of A/R, Collins recommended that companies ensure their invoices are being sent electronically and as soon as revenue can legitimately be recognized.
“Review and ensure that all invoices are 100% error-free, lest cash-strapped customers defer paying the entire invoice until questions are resolved,” he said.
Collins also suggested that when pressing customers to collect overdue A/R, start with the most recent amounts first because these customers are more likely to feel the urgency to avoid falling behind.
He also said it’s important to beware of unexpected new customers. Companies should conduct all of their normal credit checks in these situations and try to determine from whom they are currently buying, perhaps in the context of winning additional business from them. A reason companies should be cautious of these new customers is because there’s a possibility they have been cut off by a competitor for non-payment.
Having key discussions with suppliers is an important step for companies that have had to lay off or furlough employees to address the pandemic.
“You should have no hesitation about asking your suppliers for various forms of relief and assistance,” he said. “Sharing the pain of changes internally and externally make it more likely each industry participant will survive and thrive.”
Companies can ask for longer terms, lower price break point schedules or rebate levels on purchases, and consignment or vendor-managed inventory.
On the other hand, companies also should be aware of the challenges their customers face.
“When you wrestle with how deep the A/R waters are getting with a given customer, view it through the lens of your obligation to protect your operation on behalf of your employees,” said Collins.
He also suggested that for large customers, a company review state-by-state COVID-19 mandates and shutdown requirements. It could be beneficial for a company to know that a given customer may be headed for financial trouble as a result of operating in one or more areas that are under stricter shutdown orders and/or are COVID-19 hotspots.
Click here to read part one of this article.
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