Every business owner wants to make more money and maximize profits. The problem is many business owners don’t know how to manage the finances of their business leaving them confused, frustrated, and sometimes overwhelmed. They’re not sure if the decisions they make are helping or hurting. Every business owner deserves to have a business with a strong financial future.
You’ve probably heard someone say, “Revenue is vanity, profit is sanity, but cash flow is reality.” After all, let’s be clear: profits don’t pay operating expenses or bank loans, cash does.
I have several clients in the manufacturing space that I’ve coached for some time now. Because they manufacture a product, they carry inventory. When supply chain was seriously disrupted, they carried a significantly higher amount due to lack of availability. Now, supply chain disruption is improving, but their inventory levels aren’t reducing. This puts a real strain on cash flow. One client is carrying over 2 months of inventory and the other client over 3 months. This puts their inventory level in the $millions. Both clients are laser focused on taking steps to reduce purchases when they can and reduce inventory levels.
If you carry inventory, you’re probably familiar the inventory turnover ratio– “how many times am I turning my inventory per year?”. The calculation is cost of goods sold annualized divided by inventory = inventory turnover. To convert this to days you take 365 divided by inventory turnover.
I’m a big believer in the Power of 1. In this client’s case, it’s “what is the impact of reducing inventory turnover by 1 days consecutively over the course of a year?”. For them, 1 day of purchases is $40,000. If they could reduce inventory by 1 day, 6 times over the course of the year, that’s a $240,000 increase in cash flow.
The same rule applies on collecting receivables. I have a professional services firm that does about $8 million per year in revenue. This company sells $22,200/day ($8 million/365 = daily sales). If this firm can do the same thing, six 1-day improvements, that’s $133,300 improvement in their cash balance for the year.
Every business owner wants to make more money and maximize profits and have a healthy cash flow. Don’t put off those collection calls or put your head in the sand when inventory gets too high. Take the initiative to improve your cash flow through a series of small improvements over a period. You’ll be glad you did.