How To Release Cash From Daily Operation?

When the economy is in the doldrums,

In 1999, a large North American enterprise with 80 regional branches introduced a plan to improve operational efficiency.

The pilot projects in selected markets reduced the cost by 10% to 15% and increased sales by more than 15%.

After its success, the company trained 25 "change consultants" to fully implement the plan.

Then there was an economic downturn, and executives at the business headquarters were very nervous.

In order to save money quickly, they sacked change consultants and asked 80 branches to continue their business in their own way.

A year later, a large private equity fund company bought the company due to its deteriorating operating performance.

Although the private equity fund tried to resume the performance improvement plan, the ability and interest of the company in its deliberate pformation has been lost. As a result, its zero sales growth and profit growth has lasted for 4 years.

The experience of the company is a typical mistake that many companies make when they cut costs in the economic downturn.

For example, during the recession of ~2002 in 2001, some companies quickly cut down the cost of operation system.

These cuts have made it difficult for company executives to manage their day-to-day operations and services, or to implement performance improvements to enable them to stand out in the recession.

Similarly, in the last recession, the phenomenon of dissolving lean performance management or the Six Sigma group is very common.

Some companies believe that their lack of time or lack of money has been successful in their efforts to improve performance. Instead, they have chosen to lay off workers in a comprehensive way, such as layoffs of 10%.

This approach is dangerous: it wastes the company's investment in personnel and process improvement.

More importantly, because employees no longer believe that leaders are concerned about whether they work in the right way, it is difficult for the company to reimplement such efforts. This disappointment has undermined the integrity of the operation.

It is easy to see these mistakes in reviewing history.

But when the battle is in the white hot stage, when capital tightening is slowing down the pace of economic activity, how can enterprises avoid impulsiveness and compression of operations and ride out the storm? Is it possible for enterprises to systematically "lose weight" without hurting the muscles and building their own future? Is it possible for enterprises to be more creative rather than instinctive?

However, the premise is that executives need constant and unequivocal emphasis on the importance of balanced operation.

In actual operation, this means that some short-term measures may be needed to keep the cash flow healthy.

It can help executives get flexibility to continue to support long-term efforts to improve operational capability and performance, whether they happen in manufacturing, purchasing, supply chain management, or R & D links.

Because cash has no immediate effect on profitability, most companies will not pay enough attention to cash unless it is in recession.

Therefore, many enterprises have plenty of opportunities to release cash, reduce or postpone the cash outlay.

An obvious approach is to tighten the management of accounts payable and accounts receivable: the adoption of simple measures, such as enforcement of payment terms and the early delivery of bills, can often shorten the time of sale for 2~4 days, which is equivalent to an increase of $100 million to $200 million in cash flows for typical consumer goods manufacturers with sales of $20 billion.

There are also many opportunities in the internal operation of enterprises.

For example, many companies can quickly and safely convert large quantities of inventory into cash.

Of course, there are good or bad ways to deal with inventory problems.

According to our experience, setting up a target of reducing inventory by CFO may result in a lower level of service and a detrimental customer relationship.

On the contrary, the leaders of the operation and sales departments should systematically inventory their inventories and eliminate the extra inventory that can be added to each link of the supply chain.

(we often hear such a reason: "I have increased 10% margin in my forecast"; "for insurance purposes, I assume that goods will come to us for 7 days"; "for just in case, I ordered a week ahead of schedule."

This will reduce inventories by 20%.

For the company with sales of $20 billion, the drop may be close to $400 million in volume, which is enough to make up for a 2% annual income decline.

Similarly, many enterprises can substantially reduce capital expenditure.

The best way to do this is not to impose artificial measures, but to gather all the parties concerned to find ways to postpone or reduce capital expenditure, and use the current mentality of large project suppliers eager to sell products and recharge their prices.

Such coordinated efforts can reduce capital expenditure by 20% and delay another 30% of capital expenditure in 12 months.

For the hypothetical packaging manufacturer, it will release $500 million in cash this year.

Raising cash flow through these methods is much better than cutting cuts, such as indifferent layoffs, which will cause dissatisfaction among employees and customers and lead to failure in service.

In addition, increased cash flow also allows executives to continue to focus on long-term measures to improve operational capability and improve performance.

In the depressed global economy, we can still hope for this: the difficult environment may help enterprises overcome the prejudices that need to slow down many improvement measures, and create opportunities for the growth of leaders with insight, down-to-earth and creativity.