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Fund Growth with Operational Best Practices

​We all know that growth in an organization requires capital. This is true for a variety of reasons and the complexities vary from company to company. Frequently, capital is required as an organization grows because more trade receivables and inventories must be carried. In most industries, payments to vendors must be made more quickly than trade receivables and inventories can be turned into cash. The most common tool to bridge this gap is a line of credit. As trade receivables and inventories grow, your organization's borrowing base may grow as well and additional line-of-credit borrowings may be substantial enough to fund current growth. Amendments to existing lines of credit may also be required. This might mean visiting with your banking representative and presenting updated financial reports, backlogs, budgets, and other information. While a portion of short-term funding probably will always come from the credit facility you have with your bank, growth to some degree can be funded (interest free) though operational best practices. At Blackman Kallick, we believe operational best practices ultimately help create cash flows. Why else would they be best practices?

Many books and probably even more articles have been written on the topic of best practices. In this piece, we will focus only on a few that are widely applicable to organizations engaged in manufacturing and distribution. Ultimately, such practices should produce cash flows that can help fund growth and drive an organization's enterprise value. Below are four ideas.

1. Foster an environment of open and candid communication.

Everyone in an organization has something to contribute. Credit managers and sales personnel need to communicate to be certain customers are paying within terms and that the relationship with the customer is being carefully managed. Another example is communication between financial and operational managers. Such communication often leads to more effective capital spending, realistic repair-and-maintenance budgets, and other improvements. During a recent discussion with a chief operating officer (COO), we learned that $1,800 a week was being saved based on a suggestion from employees in the shipping department. This yields annual savings of almost $100,000. The cost to the company? A pizza party for the shipping department where the CEO and COO presented bonus checks to the individuals with the suggestion. Everyone in an organization should help drive its value and it's important that individuals know they will be rewarded for doing so. Quarterly management meetings can assist in bridging the gap between departments. Quarterly meetings will increase efficiencies and slowly reduce “siloed” environments.

2 .Develop meaningful reporting packages and use them.

Businesses produce many reports, including daily flash reports, production variances, backlogs, and monthly financial statements, just to name a few. Too often, these reports go unread by those who need the information most. The reports produced need to have a customer base. If a report is not being used why is it being generated? Was the report needed several years ago but is no longer necessary because of changes in the business? Information that is generated needs to create specific actions. Reports are to be used, not just read. 

3. Use the information technology that you have paid for.

Unfortunately, few organizations utilize the capability of their information technology systems. You can probably get much more out of your current system without a series of costly updates. Monthly tasks like financial reporting should not be manual, time-consuming tasks. The majority of the work should be system driven with “offline” spreadsheets as reconciliation tools. We have seen complex organizations with multiple product lines and facilities close their month within a few days. If you are not seeing monthly financials within a week or so of month-end, the process is probably inefficient and manual. Be suspicious of the reasons you are given why a monthly close takes over a week. Too often, they are invalid. Naturally, seeing information close to real time provides opportunities to address problems and take advantage of these opportunities.

4. Scrap inventories you do not need.

Holding on to excess inventory is a problem many organizations have. We want to believe that the old items in the back of the warehouse will get used someday. We all know that while some items will perhaps be used, many will not. More than likely, you have been told to think of your inventory as cash. That is good advice but there are also some hidden costs we generally don't consider when carrying excess inventory levels. Such hidden costs can include:

  • excessive insurance premiums,
  • wasted time to estimate inventory reserve levels for accounting purposes,
  • unnecessary efforts required to move inventories around within facilities during physical counts or at other points in time,
  • rental or utilization of space that is really not needed.

Recording a reserve for excess inventory levels results in an expense for financial-reporting purposes only. No tax deduction is received except in very specific cases. Physically scrapping goods not only produces some cash flow (scrap value received) but also creates an income-tax deduction and eliminates some of the hidden costs noted above.

In all likelihood, none of the above suggestions are ideas you have never heard before. Seeing such ideas in print is one thing; putting them into practice is another.

All too often, senior leadership of manufacturing companies fails to have a formalized management system. They have things they do that relate to management, certainly, but there's no system — no interconnectedness, no consistency, no clear expectations attendant to the system, and no feedback within the system. At its core, management is a structured and deliberate process of allocating resources and managing outcomes, not a series of semi-controlled and ad hoc meetings, encounters, activities, and interactions with others in the organization. Ultimately, it is such a structure and a best-practices discipline that help drive an organization's value.

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Kevin Loudon