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Improve cash flow by reducing overhead Improving your inventory management and stocking practices can significantly boost your cash flow The lifeblood of any business is its cash flow – that steady stream of dollars and cents that comes from sales and then flows out in the form of wages, inventory, rent, insurance and other expenses. Unfortunately, there are times when there’s more “out” than “in,” and only sheer perseverance keeps entrepreneurs trying to close the gap instead of closing the doors. When the cash creek is running dry, look closely at how to tap the financial resources dammed up in slowly moving inventory and how to reduce the stream of regular expenses that threaten to drain the bank account completely. You might benefit by implementing “just in time” (JIT) inventory control as a first step, since this approach has the potential to greatly reduce carrying costs. But how do you reduce inventory so that you’re running lean and mean without jeopardizing future sales by being understocked? Start by calling us for the average inventory turnover rate for your industry, and compare that figure with your own rate. The formula is simple: divide the cost of goods sold (for a month, quarter or year) by the average value of your inventory during that period to get your average turnover rate. Suppose you started the year with $150,000 worth of inventory and ended with $200,000 (average inventory: $175,000). If you sold $525,000 worth of inventory in the same period, the average inventory turnover would have been three times a year ($525,000 ÷ $175,000 = 3). If your industry’s average turnover is four times a year, you can shoot for a 25% improvement in your inventory management. It doesn’t take a genius to calculate that you could do the same volume of business with a fourth less inventory (only $130,000 worth), thus boosting your cash flow with an additional $45,000. Targeting overstocks. The question then is this: Where are you overstocked? To find out, examine the average turnover for each stock item. By comparing (a) how many of each item were sold in an inventory year with (b) the item’s end-of-year inventory, you can come up with a reliable conclusion. Next, list the overstocked items that are selling well enough to warrant holding the excess. Finally, list the overstocked items that would be worth selling at a discount to recover the cash. You might be carrying items that turn over slowly because some of your better customers occasionally order them, or because they return exceptional profits. Instead, see if your vendor will accept orders for single units with 24-hour delivery. The additional handling charges will probably be less than your current carrying costs. Adding up the little things. JIT inventory management may be your most important way to reduce overhead, but don’t ignore the smaller items that can add up to significant amounts. One approach is to list your overhead costs in descending order of expense. The result is a prioritized list of which costs to examine first to see if they can be reduced. Don’t dismiss any item as “impossible to reduce” until you’ve scrutinized it carefully and involved your staff in looking for new options. It’s equally important not to drop expenses that contribute significantly to the long-term management of your operation. Many companies, for instance, drop all employee training when cash is tight, but it might be better to find lower-cost training while business is slow and more time is available. Otherwise you might fall behind the competition when the economy picks up, especially if the competition has not cut back on these types of important long-term expenditures. When cash is short, the natural inclination is to put off paying bills as long as possible, but this could backfire. After all, do you give your best service to slow payers? Negotiate a longer payment term if you need to, but then be sure to make your payment on time. When business slows down you have the time – and the imperative – to examine every part of your operation and to streamline procedures:
Employee savings. Analyze results, not efforts, to gauge which employees should stay where they are, which should be retrained, and which should be let go. Determine your ideal number of employees by comparing your needs during your slackest times with your average days. Staff for your minimum needs as long as that level will not compromise service most of the time. It’s less costly to pay overtime or bring in temporary help during peak periods than to keep unnecessary employees on the payroll. Involve your staff in a drive to in-crease efficiency. When they come up with money-saving ideas, show your appreciation. While bonuses are nice, what counts most with many people is a public “thank you.” Also involve your staff in cutting the cost of employee benefits without compromising the quality or scope of coverage. Reduce training costs by providing incentives for employees who are willing to upgrade their skills at their own expense. Facilities. Compare your rent with what you might pay if you moved, and then ask your current landlord if your lease can be renegotiated. If you are willing to sign a longer lease, you may get a price break now or have the rent forgiven or deferred in your slowest months. If you decide you must move, look for a new landlord who will pay off your current lease and cover your moving expenses. Also consider shrinking the area you occupy and subleasing some of the remaining space. If you own your building, ask your banker about refinancing at a lower interest rate or over a longer term. Other costs. Keep only the dues and subscriptions that serve you with valuable information or raise your profile in your industry or community. An expensive golf membership has to be evaluated in terms of whether your income would drop without it. And while you’re on the golf course, ask your friends about what they’re doing to reduce overhead. Networking can find you a better bookkeeper, a less expensive janitorial service or a tip for trimming your inventory still further so that your business is buoyantly afloat and doing well when the economic tide turns. Based in Mesa, Arizona, and serving closely held businesses in the East Valley, the Phoenix area and throughout Arizona, Schmidt Westergard & Company, PLLC, is an independent full-service tax, audit, accounting and business advisory firm focusing on the middle market. |
