Is the recession over? Reports show that we are continuing the slow climb out. While the hill may be tall, chances are the recession has given you new tools to manage the effectiveness of your business and business capital – a renewed focus on cash flow and collections. But is that enough to get you into smooth waters?
It’s All About the Cash
Back in 2008, many businesses turned their attention to cash flow. You may have called vendors and asked for longer payments terms. At the same time you were getting more aggressive on your accounts receivable by improving your billing and also limiting credit lines or moving to cash only sales for customers that were slow to pay. By measuring the number of days payable and the number of days sales outstanding, you could be more flexible with the cash you had on hand, which was growing because of your efforts.
While improving your accounts receivable efficiency is always an effective long-term strategy, pushing out payables is not. Vendors either push price increases onto slow paying customers or shift to cash on delivery for critical items, both of which hurt you in the end. There is, however, one area of working capital management that is often overlooked and is usually more impactful than anything else. For many companies it is one they still have to tackle – inventory management.
The Inventory Management Debate
Is inventory management a struggle in your organization? If so, you’re not alone. Your sales staff wants you to have inventory on hand so they can service clients timely in an effort to gain market share. That’s probably in contradiction to those on your staff who are responsible for managing cash flow. They want lean inventory.
The good news is that these groups don’t have to be in conflict for a company to grow. The solution is often as simple as having the right inventory at the right time. Yes, this is a challenge when the economy is growing. Forecasting sales into a growth period can be difficult, but the key is to measure and analyze so that your organization can act as one.
Salvage what you can from obsolete inventory and consider disposing of what you can’t. Reduce slow moving inventory to a level that better fits projected sales. After all, excesses of these items are just taking up valuable floor space that a higher volume product can fill. And remember, you should have inventory of what you know you can sell, not what you hope you can sell.
Inventory Management Help
This next step in working capital management may not be as easy, but it is critical to the performance of your company. If you need help identifying ways to strengthen and improve your inventory management function, talk to Rea & Associates. Our team of tax professionals can assist you with determining what you need to do better manage your business’s inventory.
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