A newly formed company in the business of manufacturing and distributing nutritional bars was acquired from a protein supplement company. Because of manufacturing costs and limited credit availability, the company was experiencing constrained cash flow.
The company engaged an experienced financial executive, now a NextLevel team member, to serve as interim chief financial officer. He quickly began directing and leading an in-depth analysis of the manufacturing process, including standard costs make-up, raw material costs, labor rates and processes. In addition, the NextLevel executive performed a detailed review of the credit facility agreement with focus on accounts receivable and inventory that secured the facility, along with “ineligibles” that reduced the borrowing base under the credit agreement.
The analysis of the manufacturing process, standard costs, labor rates and raw materials resulted in an update of the true costs of company products. It also resulted in the realization that production rates needed to be significantly increased to achieve enough economies of scale to reach targeted production volumes and gross profit margins.
With an understanding of the true costs of production and manufacturing inefficiencies due to limited production volume, management was able to rightfully assess moving to a co-packaging arrangement with other third-party production facilities and dispose of its own facility.
Understanding the borrowing base and “ineligibles,” the accounting team was able to focus on timely collection of accounts receivable, clearance of discounts taken by the retailers (both approved and unapproved) and inventory aging. These efforts resulted in a faster turnaround from point of sale to collection, increasing cash flow. Reducing the ineligibles in the borrowing base increased the base under the credit facility providing additional funds for working capital. These activities combined resulted in a 12 percent increase in cash flow.