I believe that management teams spend a lot of time looking at their income statement and not paying enough attention to their cash-flow. But most recently I am being asked how to find CASH more often than not. I think this is a good sign.
These are rarely conversations about Series-A funding or mezzanine financing. I am usually talking about ways to free up CASH from operations by changing the infrastructure or the processes.
If you are a retailer, I would suggest a meeting with your warehouse manager or your strategic suppliers to brainstorm how to help each other in freeing up CASH. As basic at it sounds, very seldom are these conversations a brainstorm on how to double the delivery frequency of each SKU while significantly cutting the quantities in each delivery. Most people seem to assume current replenishment parameters are non-negotiable and most often these conversations instead tend to be about expediting late deliveries, backlog orders or out-of-stock items.
So let’s reset these conversations.
To begin with, you shouldn’t need more inventory than you can sell in the time it takes to replenish what you sold, and maybe just a bit more to protect yourself from natural variability…or “Murphy’s Law”. So go ahead and reduce the number of units per SKU that you hold, and keep an amount much closer to what you would typically sell during the replenishment lead-time. And if you then have extra space left on your shelves, you might want to add new SKUs.
Now you can discuss how to manage more frequent and smaller orders. Why should you order a whole batch/box if you won’t sell those many items before you can get more? You will end up with more inventory (stranded CASH) than you need, or not enough (lost revenue) if you wait too long to order more. So break the bundle and just order what you need. Plus, if you are ordering from a supplier, chances are they will be happy to discuss more frequent payments for smaller more frequent deliveries. Think cash-flow.
Figuring out how to do this will free up a significant portion of your operating CASH. Be humble because replenishment can be done much better than you do it today (nobody is perfect), be ambitious because you can accomplish a lot more than you might imagine, and roll-up your sleeves because the solution might be hidden behind small details.
There are many ways you can partner with a smart warehouse manager or supplier to increase the inventory turns. We all know increasing your inventory turns means more sales with the same assets, and this is not only better ROI, but also more CASH in your pocket. And it could arguably translate into higher leverage (think sales growth, not debt) and contribution margins compared to the previous cycle. Breaking bundles and increasing the frequency of your orders to replenish just what you sold is a very powerful way to increase your profitability. Your order management process should get a lot of your attention. And by the way, recently I have not seen any case in which these changes didn’t mean absorbing a negligible increase in operating expenses compared to the increases in profitable sales.
Unfortunately, as simple as all this sounds, we rarely take the time to explore our options and challenge the status quo. And in bigger companies, the roadblock often seems to be the wrong set of performance metrics and a matter of who wants to make sure their “silo-ed” internal dashboard looks better…if you know what I mean…
So…pay your warehouse manager or your supplier a visit, buy them lunch and talk with them about how to break the bundle to improve cash-flow.
Good luck,
Jose-Luis Bretones
Linar Advisors – Managing Partner
PS: I forgot to mention that smaller order quantities might also end up helping the warehouse help you tackle lost orders due to out-of-stock. Think residuals. But this is another conversation.
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