How Do I Optimize Cash and Working Capital


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Many organizations spend between 30% and 60% of their revenues procuring third party goods and services. This expenditure represents a significant opportunity and risk. Risks include the loss of cash (leverage and compliance related), supply continuity, delivery performance and quality, lack of innovation from suppliers, process inefficiency, legal and regulatory compliance, fraud and many others.

As a product-based industry, cash can become ‘locked up’ in raw materials, “Work in Process” (WIP) or Finished Goods inventory. And, that can exist anywhere in the supply chain from manufacturing, to distribution and retail.

What happens when inventory builds in a supply chain?

Inevitably, the cash cycle slows down, working capital becomes more scarce and balance sheets get bloated with unabsorbed costs and idle inventory. So, how can you optimize cash and working capital?

Executives have many options including: (1) Increase sales incentives; (2) Slow production; (3) Work on improving future demand signals to increase visibility; (4) Cut overhead costs; (5) Open new markets; or (5) Optimize business operations and cash management.

Today’s Orchid Advisory is about Option #6 – The “Optimization of cash management.” That is, what actions can you take today, that have an immediate impact on available working capital. Orchid has a few time-tested solutions up its sleeve, some of which are priced on a contingent fee basis. No risk…lots of reward! In fact, our seasoned business consultants have provided seven figure returns. Now isn’t that fun!

Read more below. And / or register now for our free webinar on September 18 called “Firearms Industry – Cash Management & Working Capital Opportunities”

How Do We Get Cash From the Cash Conversion Cycle?
Take a look at the following graphic and note the interrelationship between the functional departments and their impact on cash.

  • Sales, operations, and procurement have a heavy influence on inventory growth levels, which are hopefully optimized with modern-day “Sales and Operations Planning” (or S&OP) processes.
  • Finance and Accounting set the policies and controls that influence the timeliness of payable and receivable activity.
  • Collectively, these four functions can utilize management policy, calculated risk-taking and refined business processes to squeeze the cash conversion cycle. 

 


(credit Rydberg Protiviti 2008 presentation)

What steps can be taken to identify cash drains and slow movers of cash
Well, lets look at the constituents of the Cash Conversion Cycle and their impact on Working Capital. Working Capital management is not simply the responsibility of the finance department. The conversion rate of purchases to sellable products to the collection of cash (the Cash Conversion Cycle) can be heavily influenced by the nature of practices within the supply chain.

So, management must:

  • Determine the optimal level of working capital.
  • Identify and uncover sources of uncertainty
  • Re-assess the Working Capital Policy (beginning with a one-day Orchid Advisors diagnostic)
  • Embark on one of the common business projects noted below; and
  • Determine if you have the proper controls to manage the business thereafter.


What have Orchid’s executives found?
After years of consulting for small to Fortune 100 companies, we’ve found the trends and opportunities to be relatively the same across businesses and industries.  The good (maybe great) news is that there is always cash to be found! And take note, these opportunities for increasing Return on Assets Employed can be used during good times and bad. Cash is king…optimize it when you can!

Common Root Causes

  • Spend is fragmented, indicating an opportunity for leveraged buying
  • Lack of integrated Sales and Operations planning
  • Financial leakage in the form of duplicate payments, unused credit memos, weak royalty and licensing control, etc.
  • Limited standards for acceptable payment terms
  • Few or no supplier improvement initiatives
  • Fraud indicators exist but are often times not recognized and/or not acted upon.

Corporate Reactions (any of these sound familiar?)

  • Significant increases in on-hand inventory (and corresponding serial numbers to count…yikes!)
  • Freeze on hiring, salary increases and reduction/elimination of bonuses
  • Cuts in expenses such as travel and entertainment, training, and marketing
  • Deferring investments in technology, plant and equipment, acquisitions, etc.
  • Aggressively collecting receivables / Delaying payments to suppliers


Orchid Advisors Solution to Cash Optimization
As noted in the introduction, many organizations spend upwards of 60% of their revenues procuring third party goods and services. And, procurement is one of the key business processes that can impact your working capital position. Moreover, every dollar saved through procurement improvements drops directly to the organization’s bottom line.

There are a number of short-term and long-term projects that you may embark upon with a firm like Orchid Advisors helping out. Each has its own level of anticipated return, but–take note–all of which are common business practices that should not be overlooked.

  1. Spend Management: Supplier Fragmentation (returns up to 15%)
    1. Strategic Sourcing
    2. Standardize Specifications
    3. Aggregate Volume of Demand
    4. Rationalize Supplier Base
    5. Redesign Procurement Transactions
    6. Update Contracts; Audit existing contracts
    7. Conduct a Supplier Feasibility Analysis (e.g., Do we really think that engineering tolerance matters on the holster?)
  2. Spend Management: Reduce Leakage (returns up to 1% of spend)
    1. Spend Analytics Across: A/P, P-Cards, T&E, Claims, Contract Compliance and Fraud
    2. Standardize Favorable Payment Terms
    3. Duplicate Payments Recovery Analysis
    4. Manage Procurement Transactions
    5. Enhance Master File Cleanup ?
  3. Inventory Optimization (returns up to 75% by category)
    1. Improve Visibility and Demand Planning
    2. Manage Spares / Warranties
    3. Warehouse Management
    4. Focus Management of High Value and High Usage Items
    5. Proactive Inventory Planning (on-hand management, delivery lead times, reorder points, min/max levels and safety stock)
    6. Inventory Count and Segmentation
  4. AR / Procurement / Cash Management Cycle Review (returns up to 2% of spend)
    1. Evaluate Customer Acceptance
    2. Develop a strict Credit Policy
    3. Properly Age and Review Receivables
    4. Engage in proactive Cash Collection Efforts
    5. Consider Outsource Collections
    6. COD or Cash Before Delivery
  5. Royalty and licensing audits (returns up to 1% of licensed revenue)
    1. Identification of contractual responsibilities
    2. Fine tuning agreements
    3. Licensee audits
    4. Recovery
  6. Optimize cost structure (returns up to 20% of spend)
    1. Implement zero-based budgets (Operating and Cap-ex)
    2. Review and rationalize discretionary spending
    3. Analyze and optimize span of control given current environment
    4. Explore opportunities for functional consolidation
    5. Assess out-sourcing and/or in-sourcing opportunities

Take Action & Achieve Results
The benefits of managing the Cash Conversion Cycle and each of its constituents come right out of the first-year finance text book:

  • Reduced on-hand inventory
  • Reduced inventory carrying cost
  • Improved Inventory turnover
  • Improved Inventory visibility and reporting
  • Lower initial purchase price for materials and services / Lower G&A costs
  • Improved demand forecasting

So, given that these activities can be started tomorrow on a contingent fee basis, why wait? Orchid Advisors is the only management consulting firm dedicated to the firearms industry. Not only do we understand the ‘business of your business’, but we’ve got a keen eye and a proven track record for achieving high profile business results while enhancing your regulatory compliance profile.

Contact us Today