Working Capital Management Review

Focus on cash, not profit

Ian was the owner of wholesaler business distributing scented pot pourri products, many of which his staff assembled in-house. He had clearly found a niche in the market and was winning contracts from many store chains. He knew that he had negotiated good margins and felt comforted that he operated from a low cost facility so he was highly profitable. So why was he always short of cash and had the bank breathing down his neck?

We walked Ian through his production and cash collection processes. It became clear that he had been bulk purchasing sensibly to obtain discounts but this meant that stock had accumulated and some products had been prepared for stock. At the same time, suppliers were being paid promptly. At the other end, invoices were slow to be raised, often missing his customers' accounting period dates, and were not chased effectively.

We helped Ian design a production process more in line with customer demand. We suggested that he could offer customers incentives to provide more advance notice of orders so that he could plan effectively and not hold so much stock. We pointed out what Ian already knew (but was finding difficult to accept) that some of the slow moving products needed to be stopped and existing stock realised by special offers.

We then helped to train the sales force and credit controller about how best to deal with larger and bureaucratic customers.

" There is nothing mystical about working capital management. It's good business practices and often simple common sense. Sometimes you simply need an outsider to help you see the wood from the trees and share with you some ideas that others have found to work"

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