What would happen if you, an executive, believed your company’s performance was excellent, but then discovered you were short on cash just when you needed it to support growth? Here are the stories of two companies who found themselves in exactly this situation.
Both companies were profitable and had a long history of success. However, we found that in both cases, the cash-to-cash cycles were well over 200 days. If these companies were going to hit their growth targets, the owners would have to come up with large capital infusions to support the anticipated growth.
The CEO retained me because the company expected significant growth due to new product rollouts, and they wanted to be sure their supply chain component could support that growth. First we measured the cash-to-cash cycle and discovered that it was very long, too long to provide the necessary working capital. In fact, the CEO would likely personally have to come up with over a million dollars to support growth. When we measured turn and earn we discovered that a number of products had very low turns and very low (or even negative) margins.
This company’s banker suggested a check-up, because while margins were holding steady, inventory turns seemed low and there was too much slow-moving inventory. Their shipped on time rates were very good, but when we checked the turn and earn we found that many products were very slow turning with low margins, mostly because the company had allowed too many old products to languish in inventory when new products were introduced.
Since many of their products were produced off-shore, lead times were very long, limiting the capability to update products in response to market shifts. This created excess inventory and caused low margins on many products.
How can executives avoid this type of surprise? How can they create the jet fuel for profitability and growth from their engine room of operations and supply chain?
Let’s have a look at the Executive Command Center. The Executive Command Center is a way of focusing on key activities that support profitability and growth, much like the flight deck of an aircraft carrier supports the launch of aircraft. The Executive Command Center is comprised of key components for profitability and growth:
- cash-to-cash cycle
- turn and earn
Shipped-on-time is the primary measure of success and is a gauge of speed, the most influential factor in growth in today’s global marketplace. Many companies don’t know what their shipped-on-time performance level is, partly because they don’t control the dates on which it’s based. Many sales systems use a default date for shipping commitments, or customer service operators will default to today. The result is never knowing if you’re keeping your promises to your customers.
A past client thought their shipped on time rate was about 60% (which is really awful). When we measured it properly, it was only 24%. It’s a wonder they had any customers left. In our work together we quickly moved it into the mid-80% range and they ultimately brought it up into the high 90s.
Shipped-on-time is measure of meeting commitments, like producing your monthly financial statements on time. Every element of most any kind of business can benefit from a shipped-on-time measure. It leads to greater speed, which is what a company needs to get off the ground.
Cash provides the fuel for growth, which is why it’s critical for executives to measure the cash-to-cash cycle: the number of days from when you spend a dollar to when you get it back from customers. The major components are days in receivables, days in payables, and inventory.
What’s your cash-to-cash cycle? In my experience measuring it at different companies over the years, 55 days seems to be a good number. Of course this requires high inventory turns, since the accounts receivable and accounts payable days often offset each other.
Inventory is usually the key to a low cash-to-cash cycle. As inventory is reduced, not only does cash increase, but profit flows to the bottom line. This is due to factors like bank borrowing rates, handling costs, exposure to obsolete and adjustments, and floor space.
The next issue of Growth Accelerator will include:
- How to increase capacity without capital investment
- How reducing lead-times cuts costs and allows you to be responsive to the needs of the market place
- How measuring turn-and-earn helps manage profitability and cash flow
- What happened to Company A and Company B, and how they used Executive Command Center tools to turn things around
© 2014 – Rick Pay – All Rights Reserved