Supply chain costs are soaring all over the world. And like many of your competitors, you’ve probably been thinking about how you’re investing your working capital.
Are you rethinking your inventory decisions? Moving operations to cheaper destinations? Contemplating a more local supply chain?
Or, are you thinking like Mr Musk and planning on escaping to Mars, just for some headspace?
Well, before you pack your bags with a tear in your eye, here’s an antidote to your angst.
In terms of the rule book for your revenue, there’s a strong chance your balance sheet looks dramatically different to pre-COVID. Be that in overall business performance, departments or products.
When it comes to the supply chain, there are good opportunities to cut costs and unlock working capital. But now, more than ever, there’s risk hidden in every move.
Cut costs in the wrong area and you could be left short in supply. Over-invest in the wrong stock and you could be bleeding the business of working capital by locking it up in products you can’t shift.
Put simply, death by a thousand cuts. It’s a catch-22. But that doesn’t mean you can’t increase your odds of coming out on top.
Whilst it’s not necessarily a good plan for business excellence, colonising Mars gives us a lesson in utilising working capital.
Let’s say you’ve snagged a seat on the first flight out. It’s going to be a long one, so you’ve packed a deck of cards.
As you get talking to your fellow passengers, you realise you’re surrounded by some pretty impressive people. And herein lies the first lesson.
Colonising Mars will be tricky… talk about an understatement. Probably even more troublesome than keeping your head above water post-COVID. If you can imagine that.
And so, in difficult scenarios like this, you have to squeeze the value from every opportunity. There’s no space for passengers who add no value.
Every person on the flight to Mars, and in the eventual colony, must offer something for the greater good. They must pay their way. Or, once there, the whole entity could fail.
Back on this planet, your working capital must yield the same usefulness if you’re to survive in harsh, alien conditions.
Your inventory, debtors and creditors must be managed incredibly closely and evaluated regularly.
Much like the colony on Mars, if you’re unable to finance the day-to-day running of the business, it’ll simply cease to be operational, cutting off the oxygen supply which keeps it afloat.
Equally, put too many builders on the flight, and there’ll be some left twiddling their thumbs. Likewise, you don’t want working capital sitting around not doing anything when it could be reinvested where it really counts.
The reality for most businesses is that they must find the right balance between high availability and optimal investment in stock.
Invest in too much stock and you’ll find crippling cash flow issues soon follow. On the other hand, fail to invest enough and you’ll be limited to offering a poor service which turns happy shoppers into angry customers.
Inventory risk should play a big part in your working capital analysis. Any investment which seems sound, but is tied up in products that never sell is a problem.
And inventory is a different animal to capital.
Most inventory has a shelf life. Be it from their perishable nature or risk of obsolescence as a result of shifting market demand. And so, an over-supply of stock creates a huge risk.
Poor decisions today could follow you for months or even years into the future. Especially if the products you’re investing in are slow-sellers. Therefore, you need to keep an eye on your trajectory.
Becoming au fait with continuous assessment can make your venture a success. Just like a lack thereof can let the oxygen slip.
Here are a couple of metrics you should keep a close eye on:
This simple financial ratio highlights how many times a company has sold and replaced inventory during a given period. Something you should have fairly robust data for.
Obviously, the higher this metric, the longer your working capital is tied up for. And to work this out, calculate based on the cost of goods sold, rather than revenue.
Inventory turnover days are used as an efficiency ratio.
To calculate days in inventory, divide the cost of average inventory by the cost of goods sold, and multiply that by the period length. Which in most cases will be 1 calendar year?
The cash conversion cycle is the timeframe from a purchase order being paid until the associated payments are received.
Simply, money out versus money in, by product.
Your business must naturally use its own resources to fund stock in the interim period.
But one important calculation here is ‘Earn x Turn’, a product’s margin multiplied by the annual number of stock turns.
Like so many lessons in the supply chain, there’s only so much you can ascertain using analogies about Mars until the real analysis must take place.
And so, we’ve written a checklist to help you apply the theory in practice.
10 questions to ask yourself, which can ease your working capital worries. 10 puzzlers to posit to your supply chain department, which might calm your cash constraints.
Answer the 10 questions below to discover how well your supply chain department manages working capital:
These questions aren’t designed to be easy.
But if you can find good answers to each one, you’ll find your chances of success rise like a rocket ship.
And whether you’re embarking on a project as precarious as colonising a new planet, or simply trying to keep your cash flowing, only the right analyses and strategies will yield success.
Don’t shy away from making these calculations on an ongoing basis either.
It’s a short-sighted business which doesn’t re-evaluate continuously to see where capital could be better utilised.
After all, there’s no room for passengers on your rocket ship. And every pound invested must earn its place.
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