In the case study I mentioned in my last posting, the executives needed to quickly find cash to prevent the bank from revoking the company’s line of credit. One of the first places all the groups reviewed was the inventory line of the balance sheet. In this company, inventory had increased dramatically in the years since the father left and presented a real opportunity for the company to raise cash. The big challenge was how to convert the material in the warehouse into cash for the bank. There are basically two ways to do this, either sell more or produce less but there are pitfalls with both.
Selling more product requires increased advertising, new distribution channels or additional sales people, all of which require cash up front and may not work as well as planned. Another way to sell more is to cut prices but this comes with a big risk to margins (just ask the retailers and auto companies about what happens when you train your customers to wait for special discounts) as well as the reputation of the business. On the other hand, producing less can be just as painful. Producing less requires the company to idle plants, cut shifts or reduce hours having a direct and potentially long term impact on the workforce. While all of these are unpleasant, if the future of the business is on the line most owners will do some combination of these to save their business.
The Third Way
I mentioned the two basic ways to manage excess inventory but there is a third way. The third way is to prevent it from getting out of hand in the first place. Businesses that rely on inventory need inventory measures and targets. Additionally, the management team should know within 5-7 days after the end of the month how they are doing against those targets and some retailers and manufacturers may need this information weekly or even daily. Finally, reviewing the reports is great but managers need to follow through with actions to bring inventories back in line; trust me, this is far easier to deal with in the short term rather than delaying it.
I’ve never heard anyone say “Inventory Is King”; managing inventory will put cash in your pocket.