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Cash is Not King

It’s the King, Queen, Jack – it’s THE Thing!

An associate of mine, Phil Symchych has said before: “Cash isn’t king – It’s the ace!”

Growth sucks cash. As we all know, it is often the situation where a profitable company simply runs out of cash and can end up in receivership. There is such a thing as trading while insolvent. The cash flow report is a tool that shows where your cash has gone and using this on a 12 month rolling basis can help you forecast where your cash is likely to go. Cash gets “lost” in such day to day activities such as AR (Accounts Receivable), AP (Accounts Payable), Inventory (inc WIP, work in progress), repayment of debt, dividends, servicing unprofitable customers and for the smaller businesses, owner’s drawings.

This is why using EVA is such an important measure, especially when used in conjunction with other measures like your rolling cash flow forecast. It helps establish if last month’s decisions grew, or subtracted from, the company’s value.

I have written ad nauseam on how many times I am surprised by businesses not adhering to business 101 principles. It astounds me that executives allow themselves to be distracted by the day to day noise and excuses rather than remain focused on the basics and ensure their 101 principles are in place. It’s like a rugby side’s back line not knowing how to catch and pass, and yet we see game after game backs executing poor passing skills and the ball being thrown either too high, not in front of a moving man and many other basic sins. High performing teams do not lose sight of the basics, they watch the ball into their hands each and every time so as not to drop it. The same applies to your business.

Supply Chain and Inventory Management skills are the business equivalent to watching the ball into your hands when you catch. They also help to reduce the amount of cash that will be sucked into your business by growth. These skills help leverage capital investment by recycling the same capital when your inventory turns increase. As Albert Einstein said, “Compound interest is the eighth wonder of the world”.  Increasing your inventory turns is compounding your investment in capital. 

How does one achieve this? It requires some basic supply chain disciplines to be in place within your business. Some of these disciplines are not sexy or fun. I often say it is like doing your housework: sometimes unpleasant, often inconvenient but absolutely necessary for a clean and healthy home (read business).

The skills and disciplines required are:

  • Inventory accuracy – Fundamental to so many aspects of your business from being able to confidently make promises to your customers about their orders through to how you invest your capital. Inventory accuracy comes from deployment of a regime of cycle counting and having real time data capture in your operations.
  • Forecast accuracy – as a key input to a SIOP (Sales Inventory and Operations Planning) and your cash flow analysis processes. SIOP provides forward looking visibility into likely inventory and cash requirements.
  • Sharing the results of your rolling SIOP forecasts with suppliers to provide them with visibility to help reduce lead-times and lowers risk of supplier stock outs.
  • Understanding your cost to serve. Acknowledging that not every customer or sale is profitable, no matter what your GP (gross profit) reporting is telling you. You need to know what your cost to serve is. If you don’t you need to start to understand it. You need to know which customers and what order profiles are adding to your revenue but sucking the life out of your profitability and value of the business.

This is where EVA is such a key metric.

If you’re an executive or owner of a mid-sized or large company and want to discuss ideas on how you can use systems and technology to dramatically improve efficiency, decrease costs, and increase profits and enhance scalability, give me a call. 

© David Ogilvie

cash flow, forecasting, inventory management, supply chain

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