CTL Engineering, Inc.

Cash is King

As most of you know, cash is critical to CTL’s success. What you may not know is the important role you, and all other employee owners, play in improving CTL’s cash flow.

Cash flow, simply put, is the amount of money the company has to pay its bills. The more cash we have on hand, the better off we are as a business. Conversely, when we have less cash on hand, we may need to borrow and pay interest on the borrowing.

To illustrate, let’s look at a personal example. Your friend Joe borrows $50 from you until next payday. At lunch, Robert forgets his wallet. You pay and he promises to repay you five dollars next week. That evening, your son “borrows” twenty to go to the movies with his friend. So, in this typical day, you’ve used $75 in cash you didn’t plan to spend.

In the meantime, you continue to receive bills for your car payment, home mortgage, groceries, cable television and so on. All your “suppliers” demand payment and charge interest or late fees if you don’t pay on time. You start repaying your bills and discover, because you’ve loaned money to Joe, Robert and your son, you’re $75 short. What do you do?

If you’re like most people, you pull out the plastic and charge it. This, however, is very costly: the average credit card interest in 13.37%. If you’re like most Americans, you’ve employed this strategy too often: the average credit card balance is $9,312. A better strategy would be to budget, reduce your spending and collect the money that Joe, Robert and your son owe you quicker.

Now let’s look at how CTL promotes positive cash flow. After we receive a request for proposal, we invest time to estimate the project and to submit a competitive bid. This, of course, is an important part of our business. From a cash flow perspective, we spend money putting together estimates and bids with the hope of earning the client’s business.

If we earn the clients’ business, we invest time and resources into creating a contract, hiring subcontractors and getting organized. Once the resources are in place, we deliver the service to the client and, finally, invoice for our work. Invoicing creates an account receivable, in other words an IOU from the client to us. It becomes cash when we collect the cash from the client.

As you can see, this is a long process. Meanwhile, CTL is spending cash to pay salaries, subcontractors, overhead and other expenses. This is why it’s so critical that we manage our cash flow. If the company’s cash reserves are low – which is normal from time to time – we have a line of credit with Huntington Bank that we can draw on to cover the cash shortfall.

The credit line is sort of like a company credit card, but its interest rate fluctuates with prime (right now 7.50%) as interest rates rise and fall in the market place. CTL uses the budgeting process to manage cash flow and minimize usage of our credit line. This reduces interest expenses and makes CTL more profitable. Higher profits lead to increases in stock value.

Here are a few things we can do to improve CTL’s cash flow.

     1) Make sure every project has a signed contract in place
     2) There should be a clear understanding of scope for all parties
     3) Provide accurate, timely estimates
     4) Record billable time as it is used
     5) Implement proper usage of subcontractors
     6) Invoice when the project is complete

The bottom line: Cash is king. The more we all do to improve cash flow, the better off we are as a business