19 Tips for Better Cash Flow Management: Cash Management Is More Important than Ever

Traditional Practices May Not Be in Your Best Interest Today

By David Hetherington

This article was originally published in Book Business Magazine on December 1, 2009 and has been updated accordingly.

Effective cash management is critical to the health of any business, but the recession and associated credit crunch have made paying close attention to managing cash more important than ever. Tight credit, increased bank focus on compliance with existing loan covenants, and revenue streams with less predictability have made it essential that businesses pay more attention to cash inflow, outflow, and retention.

Contrary to popular belief, cash management is not the sole province of the finance department. It requires the cooperation and participation of every major functional area of the organization.

More importantly, the new emphasis on cash management may require that certain long-cherished beliefs about the “right” way to manage the business be reexamined, and decisions based on lowest unit cost take a back seat to actions that conserve cash reserves. Here are some of your options.

Paper

With the possible exception of compensation and benefits expenses, inventory investment is likely to be a publisher’s largest single drain on cash.

Inventory takes two forms: raw materials (e.g., paper) and finished goods. While building raw-material inventory may be valuable in times of tight supply and rising costs, it is a questionable strategy under current market conditions.

• If you must inventory paper, minimize the number of grades and sheet/roll sizes brought in. Many publishers print on a slightly oversized roll or sheet to keep inventory investment in check. The incremental cost of doing this will be more than offset by the lower storage charges, reduced inventory obsolescence, lower safety-stock requirements, and potential incremental discounts earned by purchasing larger lots.
• Floor Programs: Many mills/merchants will stock popular grades and roll sizes on the floor at printers (effectively, a consignment program), allowing publishers to acquire inventory on the fly, with many of the same benefits as cited above.
• Printer-Supplied Inventory: While printer-supplied paper can be slightly more expensive than publisher-supplied stock (printers usually charge markups), the economics warrant closer examination. Avoiding advance purchases and inventory-storage costs can free up cash.

Finished Goods Inventory Strategies

• One-Stop Shopping: Publishers frequently opt for a “lowest cost” strategy that results in components being sourced from specialist firms, text paper sourced from the mill or merchant, and manufacturing sourced from a third supplier—causing three times the paperwork, coordination, and invoicing and payment based on the completion of the individual activities, rather than delivery of the end product.
  
  Sourcing inventory, components and manufacturing from the printer can result in significant improvements in cash, as the printer typically will bill for all three services upon order completion.
  
  While total cost may be a bit more than sourcing each element individually, the convenience of a single point of contact and coordination, and the extended cash cycle, are well worth considering.
• Print-on-Demand/Short-Run Digital Printing: There’s little doubt that print-on-demand (POD) and short-run digital printing (SRDP) have “arrived” and proven themselves as viable alternatives to offset printing. While unit manufacturing cost remains a concern, the quick turnaround offered by digital manufacturing is impressive. When one considers the comparative cost of net units sold (including the value of unsold inventory) rather than unit manufacturing cost, the benefits of POD/SRDP are difficult to ignore.
• Export Inventory Demands: Many publishers find themselves printing extra inventory for export to foreign subsidiaries and partners. Manufacturing for export typically involves extended cycle times to allow for ocean freight, and significant safety stock (aka “just-in-case” inventory) to protect against stock-outs. Sourcing from local POD providers should be given serious consideration to meet your export needs. While unit cost may be higher, the improved cycle time, reduced risk of lost sales and lower investment in export inventory can offer significant cash benefits.
• Use of Offshore Manufacturers: While there may be benefits to considering offshore manufacturing, the supply chain is unquestionably longer, and the risk of stock-outs increased. One tactic used to mitigate the stock-out risk is to increase the print order to compensate for the longer lead time. This may be a viable option for an individual project, but on a cumulative basis, the result is likely to be bloated domestic inventories. Consider the full costs of offshore manufacturing, including stock-outs or unsold inventory. Publishers should also consider the recent issue that has surfaced with the prospect of potentially significant tariffs associated with books, book plus, and stationery items manufactured and imported from China.
• Free Advance-Reader Copies: Free adoption-review or advance-reader copies can be expensive—especially when packing and delivery costs, and the possibility of the samples surfacing in the used-book market, are considered. Electronic alternatives are well on their way to market acceptance, and over the course of a budget year can offer significant cash-conservation opportunities.

Cash Discounts

• Prompt-Payment Discounts: Service providers offer prompt-payment discounts to encourage customers to pay invoices faster. Discount terms often involve a 10-day payment cycle (i.e., the vendor must be paid within 10 days of billing) versus traditional payment terms that often give the publisher 30 to 60 days to pay. While the discounts are attractive, the impact of foregoing discount-payment terms on available cash can be significant.

Staffing

• Freelance Resources: Full-time staff offer many operational benefits, but the fixed cost of salary and benefits requires a predictable flow of cash and/or access to short-term funds to meet payroll. In contrast, freelance staff, while potentially more expensive on an hourly basis, can be retained to support specific projects, and expanded or contracted (without severance costs) based on business demands. This offers opportunities for considerable cash savings if volume falls significantly below expected levels.
• Outsourcing: Outsourcing should be considered for any significant operational function that is not a “core competency” (i.e., those things the company must do supremely well in order to be successful). Among the functions that should be considered for outsourcing are IT, customer service and fulfillment. Customer service and fulfillment outsourcing are of particular interest because, in contrast to the fixed cost of permanent staff, they typically are billed as a percent of net sales volume. This represents a potentially significant advantage in periods with uncertain sales volume.

Capital Spending

• Delay Investment: Many firms have established policies calling for replacing desktop computers every three years. Except in cases where the organization has identified significant productivity gains and/or a spike in maintenance and repair costs, investment in new computers typically can be deferred for at least 12 months beyond the equipment’s projected life.
• Lease versus Buy: While a lease adds financing costs to the cost of acquisition, leasing has significant cash advantages as it spreads the acquisition cost over the life of the lease, with cash being disbursed over a 24- to 36-month period versus a lump-sum disbursement due immediately after acquisition.
• Outsourcing: One of the most significant benefits of distribution outsourcing is capital conservation. The outsourcing partner provides all of the necessary capital—warehouse, customer service, and billing systems, and in many cases the outsourcing partner now offers access to digital asset management resources that the publisher otherwise might be forced to build themselves.

Receivables Management

• Accounts Receivables: Ensuring that receivables are collected according to terms is perhaps the single most important step a publisher can take to avoid cash-outs. Collections should be a proactive process with the customer being contacted several weeks before the funds are due to confirm that the payment is on schedule.
• Outsourcing: An additional benefit of outsourcing customer service and distribution is an increase in the predictability of cash receipts. Most contracts for distribution outsourcing include provisions for scheduled remittance of funds to the client/publisher with the distributor assuming the risk of any delays in collection.
• Rights and Permission Income: Rights and permission revenues often are managed with less rigor than receivables from book sales. Rights arrangements often have multipart payment schedules and may be billed outside the conventional billings system. These revenues should be managed through accounts receivable and managed as aggressively as conventional receivables.

Royalties

• Royalty Advances: Circumstances permitting, royalty advances should be staggered and tied to specific contract-based deliverables to increase the chances that the final manuscript is submitted as scheduled and cash retained for as long as possible.
• Return Reserves: Many royalty contracts include provisions that allow the publisher to retain a portion of the author’s royalty payments in anticipation of future returns. Publishers sometimes are reluctant to enforce the return-reserve provision because of the potential implications for author relations. If you decide to implement the clause, it should be done on a going-forward basis with new titles rather than retroactive enforcement.
  
  Managing cash always is a challenge, especially in book publishing, where bills sometimes are “paid” with customer returns. The effort should be managed by the finance department, but the full support from the organization’s leadership is essential.
  
  The program launch should include discussion of the reasons for the change in policy and the expected benefits.
  
  Strengthening an organization’s cash position is a team effort, and the impact will not be felt overnight. The program should be launched before it is needed. If a cash crunch develops that cannot be met by short-term changes in policy or bank credit, the available options likely are to be few and far more draconian than those mentioned here.

David Hetherington is the vice president of global business development for Books International, a leading provider of U.S. and international book manufacturing, print, and digital distribution services for the book publishing industry.

Mr. Hetherington’s portfolio reflects a broad range of responsibilities including vice president of manufacturing, and he was subsequently appointed vice president of financial planning for Simon & Schuster’s Higher Education Group. In addition, Mr. Hetherington held other key responsibilities in finance, operations, and sales at Reader’s Digest, Wolters Kluwer Health, Columbia University Press, and Baker & Taylor.

Prior to joining Books International, Mr. Hetherington served in senior roles in the book publishing software industry including chief operating officer of Klopotek North America and as chief marketing officer for knk Software LP.

In addition to his current role at Books International, Mr. Hetherington serves as an adjunct professor and member of the advisory board for Pace University’s Graduate School of Publishing, sits on the board of directors for the Book Industry Study Group, and serves on the program committee for the Book Industry Guild of New York.

Mr.Hetherington is a frequent speaker at publishing industry events across the globe and has written articles for Book Business Magazine as well as Springer’s Publishing Research Quarterly.

In the event you have any questions about the material contained in this article, please feel free to reach out to Mr. Hetherington at d.hetherington@booksintl.com or contact him directly at (908) 458-5928.