Big picture view required to maintain cash flow

Cash doesn’t always flow as well as it should. In fact, for molders cash flow can be a business of illusions. As long as there are parts going out the back door and money coming in the front door, it can seem that cash flow is OK. But all it takes is one glitch to reveal that what was thought to be fine really isn’t so great.

Many things can cause a disruption in cash flow, but currently one of the primary causes is growth. If a molder isn’t in a good cash flow position before taking on more business or acquiring another company, growth can be a killer. 

The key to survival isn’t out of reach for the average molder, however. What’s needed is adequate planning and a big picture approach. In the end, the molder must realize that he does not sell parts; he sells time. And effectively managing that time is key.

More Than Managing Cash
Jack Tyson, director of quality and continuous improvement for Lear Corp. in Southfield, MI, has many years of experience with large automotive molders. He believes the key to maintaining good cash flow is “watching capacity levels closely as you acquire new business,” and evaluating capacity, which is usually underestimated, he explains.

“Many molders don’t include time for maintenance in their capacity planning because they’re not following fundamental manufacturing practices,” Tyson says. “As downtime arises, there goes your cash flow. Your lifeline is machine uptime and inventory control—that controls cash flow.”

Tyson says companies can get too focused on growth to the point that they don’t evaluate capacity and maintenance issues. This can lead to higher debt leveraging everything, including new business and maintenance.

It’s one thing to focus on cash flow, but good cash flow is a product of the entire manufacturing process, Tyson adds. “Cash flow is the name of the game, but for molders there’s more to it than just managing cash,” he says. “It involves managing the entire process to make the cash flow.”

Does Size Matter?
Company size doesn’t seem to be a factor in whether or not cash flow is managed successfully. Large companies can have cash flow problems the same as small ones.

Take Cambridge Industries Inc., for example. This Madison Heights, MI custom molder, which primarily serves the automotive industry, posted $541 million in sales in 1999. Yet, in May 2000 Cambridge filed bankruptcy and agreed to sell its assets to Meridian Automotive Systems Inc. (Dearborn, MI) for $363.1 million. In the bankruptcy filings Cambridge listed its debts at $459.7 million. It had a $250 million project on the books for General Motors, but people close to the automotive industry in Michigan speculate that the project strapped Cambridge’s already rocky cash flow, contributing to its financial woes.

Two other automotive plastics parts suppliers, Key Plastics LLC in Novi, MI and Breed Technologies Inc. in Lakeland, FL, also filed for protection under Chapter 11 of the U.S. Bankruptcy Code. Although Key had more than $550 million in sales in 1999, the company ran up huge debts through an acquisition frenzy in recent years.

On the smaller side, Foxx River Molding Co. Inc., a custom molder with a reported $8 million in sales in 1999, closed its doors in February 2000 and auctioned off all of its equipment and property. It was reported that Foxx closed when a lien holder cut off the company’s line of credit.

Size, however, does matter when it comes to giving a company the flexibility to rob Peter to pay Paul, says Jeff Mengel, a consultant with Plante & Moran LLP (Southfield, MI).

Mengel notes that many molders are dependent on sheer volume to produce profits and revenues. The automotive industry offers that kind of volume, but what’s happening to many automotive suppliers, he says, “is really indicative of what happens when volume drops off.”

There’s a wry remark in the molding industry that goes, “I’ll underbid on the piece part costs and make it up in volume.” Some molders aren’t laughing. When volume drops off, molders scramble for work to fill the presses. That’s usually when they get into trouble, taking on work outside their core competency, or work with little profitability, in an effort to keep machinery running.

Mengel says, “If you stay in a position to pick your customers, you’ll be more profitable than if you have to take on customers just to meet volume requirements to keep machines busy. If you’re doing the latter, you need to rethink your business model.”