INNERGISE!

Don’t slash and burn – be clever first.

For all the benefits of improving your sales techniques, and improving the performance of your people, there are some basic housekeeping that will help your business become lean and efficient, and bring cash into your bank account.  Working capital is often talked about but rarely are explanations given on what is best practice.  In this challenging economic climate, many businesses are taking the “slash and burn” route to cut cost out of the business by reducing headcount across the board.  This will almost certainly alienate you staff, and not necessarily bring about the desired outcome to the bottom line.

Working capital is the cash that is required to keep the business trading.  It can be broken down into three main constituents, Debtors, Creditors and Inventory.  Your ability to manage these three things can transform your cash balance, and impact your bottom line.  Depending on what type of business you run will depend on how influential each of these balance sheet items are.

Firstly, lets look at the Debtor side and how we turn a Customer to Cash (C2C).  You need to look at the process from taking an order, processing the paperwork, invoicing and credit control.

• Can you reduce the administration time?
• Do all the administrative processes add value?
• Can you get the invoice out any earlier? Follow the mantra BEBO (Bill Early, Bill Often)
• Deal with customer service issues immediately, since this will reduce disputes.
• Is your overdue debtor book more than 10% of your entire debtor balance (By overdue, I mean even 1 day past the agreed terms)? If so, then look closely at your credit control processes. Debts should be chased before they become due.
• Can you determine how profitable each customer is? If not, why not.
• Make sure your sales people are communicating properly with your sales team?
• Change sales bonuses and commissions to work on Gross Profit, rather than revenue, and only payable once the customer has paid.

Secondly, look at your creditors and the journey from Purchase to Pay (P2P).

• Do you have a purchase order system in place?
• Are all purchases authorised, and with pre-agreed levels of authorisation?
• Have terms and conditions been re-negotiated? If not, ask your supplier now. Some will not agree, but some will.
• Is there settlement discount available?
• Do you pay anyone early? If so, stop now. You’ll be amazed how many businesses do this.
• Do you have a clear Sourcing Policy?

And finally, your operational processes will be inefficient in some way, so let’s consider the Demand to Fulfilment (D2F).  In very simple terms, you should consider your pallets in your warehouse as pallets of cash.  They should not be in there for long, but should be working to create more profit elsewhere in the business, or reducing debt.

• Do you measure stock turn? If not, work it out, and look to cut the bottom 20% of the products that are turning the slowest out of your product range.
• Try and tie the relationship down between your marketing effort and the demand for your products. Optimising your stock levels so that you have enough but not too much, will work better if you can accurately reflect demand based on marketing activities, rather than taking the average weekly sales.
• Consider how you can reduce transit damage and returns. The costs of returns are always much greater than you think.
• See whether you suppliers can hold the stock for you and deliver either directly to your customer, or on a just in time basis to your warehouse.

In every process we are looking for cutting out processes that do not add any value.  Activity Based Costing will help determine the true cost benefit of a process.  Decisions about working capital should be made on the basis of whether they improve the cash position.  Don’t let there be a sacred cow, challenge all costs and processes, since you need every bit of help you can get at the moment.

Communication between departments is often one of the biggest factors in reducing efficiencies.  BDO Stoy Hayward recently calculated that between 5% and 15% improvement can be achieved in Net Profit through having all departments be enagaged in, and part of the process to;

• Generate Demand,
• Develop new products and services,
• Fulfill orders, and
• Manage the relationship after the sale

You will be amazed how this approach to working capital management will unearth where the inefficiencies really lie.  You will be able to identify specific cost cutting measures, which may lead to reduced headcount, but they will be targeted and justified.