Connecting the Dots … Cash Flow and Inventory– May 15, 2018

Posted by Guest Blogger Michael Ryan, M. Ryan Group

At its core, leadership is about connecting the dots across the business. To improve profitability and cash flow, a business must be linked across functions. The proverbial “dots” of sales, manufacturing, supply chain and finance must work together to be truly effective.
 
How many times have you heard one of the following statements?
 
CEO: “Sales and operations are dependent on one another, and I need to get them working together.”
CFO: “Cash that I need to run the business is tied up in inventory.”
VP Sales: “We have a ton of inventory, but it’s the wrong stuff. Our deliveries stink.”
VP Supply Chain: “We have plenty of inventory on X, why doesn’t sales sell that?"
VP Operations“My capacity on X product is sold out, and capacity on Y product is underutilized.”
 
In lower middle market companies, the dialogue above may take place between two or three people, instead of the five (or more) people in a Fortune 500 business. Oftentimes, it’s the lower middle market companies that struggle the most with inventory because the process and structure to manage it have not been built within the business.
 
Let’s focus in on the quality of inventory — having enough of the right item at the right time. Having a year’s supply of Product X in inventory is no good when a customer is ready to place cash in your hand for Product Y.
 
The first step in improving the quality of inventory is recognizing there is an opportunity to improve. Whether it is improving deliveries, cash flow or capacity utilization, as a leader in the business it’s your responsibility to identify the need and address it. Steps to analyze and act upon include: 

  1. Review sales and inventory data
  2. Determine your rate of sale by item
  3. Quantity on hand (by item)
  4. Inventory turns (by item)

For each item, it’s balancing the equation between supply and demand. Stop making products you are “long” on. Sell inventory slightly above cost to turn it back into cash. Yes, there are times when cash flow is more important than making margin.
 
For products you are “short” on, consider if you are fully utilizing your capacity. Are there improvements that can be made to reduce cycle time? If you have a differentiated product, it may be time to review and raise prices.
 
Then there’s the bottom of the barrel, the “SLOBS”, aka “slow moving and obsolete” products. This inventory can be an anchor around your neck. Identifying the items can be half the battle. Are there peripheral industries (or customers) that may be able to use the product? Selling a product that has been on your shelves for three years at or below cost is still a win; turn it back into cold hard cash the business can use.
 
Ask your CEO and CFO what they think about inventory, and if improving the quality of inventory and inventory turns would help improve the bottom line. Creating cash flow is a great way for you to be a rock star!
 
 Michael Ryan is President of M. Ryan Group and works closely with Cohen & Company’s Management Consulting Practice.
 
Contact Jim Boland at jboland@cohencpa.com to further discuss inventory optimization, business processes and other strategies to improve your business. 
 

Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.