I was intrigued as to what direction an article titled Need Cash? Look Inside Your Company would take, found in the new edition of the Harvard Business Review, as I know that most companies can find plenty of cash if they just look for it and take the appropriate action. After all, most companies are spending at least 10%, 20%, or 30% more than they need to be … and if they put the right emphasis on strategic sourcing, e-Procurement, contract management, and spend analysis … many companies could find millions without scratching the surface.
The problem is, as the article points out, that the boom years have made your average business careless with capital. But cash is king again … and if you’re not taking a hard look at your cash management strategies, you could be filing for bankruptcy instead of thriving. So where do you start? Well, if you’re in supply chain, you start with sourcing … but if you’re in finance, apparently you start by managing your working capital and freeing up the capital you have needlessly tied up in receivables and inventory. To this end, the HBR article outlined six mistakes that, if avoided, will help in this regard.
- Managing to the Income Statement
Throw those profitability performance measures out the window … it’s about the balance statement. If you measure against contribution to reported profits, then purchasing will be incentivized to buy more inventory than you need to secure a discount … but inventory ties up capital and has holding costs, which will likely cost more than you’ll save from the discount!
- Rewarding the Sales Force for Growth Alone
This encourages sales to book sales at any cost. They’ll grant long payment delays, insist on larger than necessary finished-goods inventories, but then be unwilling to chase down late payments.
- Overemphasizing Production Quality
While quality is important, an undue emphasis can cost more than it saves. Quality Control slows down production and locks up capital in work-in-process inventory. If we’re talking food production, given the recent fiascos, undue emphasis might be justified. But if we’re talking mp3 players, attempting to reducing defects from 50 PPM to 5 PPM might cost more than it saves from just recycling the extra 45 defective products.
- Tying Receivables to Payables
Generally, your customers are not your suppliers, your suppliers are not your customers, and the two are completely different financial concepts. Relative bargaining power, the nature of competition, industry structure, and switching costs will ultimately determine the terms that a company can dictate to its customers or must accept from its suppliers.
- Applying Current and Quick Ratios
Although popular with bankers, who want to ensure companies have enough money to repay their loans in the event of distress, they are inappropriate for management as they encourage companies to manage according to a “death scenario”, which means they are good IF you want to go out of business.
- Benchmarking Competitors
Although it might sound good to benchmark against your competitors, it tends to lead to complacency when the scoreboard indicates a company’s metrics are above what it believes to be the industry norm.