By Rich Bond
Practically everyone has heard the fable about “The Ants and the Grasshopper.” As winter approaches, a hungry grasshopper sees ants busily drying the grain they gathered during the summer so they will have something to eat over the winter. He begs for some food, saying he had no time to gather food during the summer because he was too busy singing. The ants rebuff him, telling him that he should have allocated his time more productively.
But let’s think about this from a business standpoint. Often CEOs need to be out singing the praises of their business in order to generate sales or raise capital. They are often focusing on tweaking products or ensuring great customer service. They believe they really can’t be bothered with the financial planning of their business and basically ignore that side – until it’s too late. Suddenly, there’s a cash crisis or an inventory problem.
It takes someone special to not only measure what the business has taken in, but also to know what the business can do in the future and make recommendations. It takes an expert. A good Controller will track basic accounting metrics and compare them to the standards for the company’s industry. The company’s bank can be a reliable source for such standard metrics. One of these critical measures is Inventory and Supplies. What is the Inventory Turnover Rate – not just for the finished goods – but also for the raw manufacturing materials? To get a complete picture, the Controller needs to measure Inventory Turnover by line item. Tracking the right metrics can enable a business to increase profits, free cash flow, and growth.
Here’s a true business story:
A $30 million manufacturing company, whose sales had stagnated, was able to study its inventory turnover in detail. The careful analysis enabled them to reduce inventory by over $1 million, while increasing the on-time order fill rate from 85% to over 90%. The additional working capital that was freed up helped the company grow sales to $50 million.
You probably guessed that I placed the Controller who performed this analysis and unlocked $1 million in working capital.
Have you had a similar experience? I’d love to hear about it. Or if you want to discuss how to better measure your financial performance can help your business, give me a call at 203-216-0618. Together, we can find the right professional to monitor your financial situation and free up the cash you need to thrive all year.
