Improving Cash flows – Inventory is the Key

I am currently following a very interesting discussion in one of Linked in groups. The moderator has raised a question “If you could do only one thing to improve cash flow, what would you do?”. There are variety of answers by some very top-notch and learned professionals. Statistically if I put it across, 80% of the answers are about managing Cash to Cash Cycle. 60% of these 80% suggest decreasing the AR (Accounts Receivable) cycle and increasing the AP (Accounts Payable) cycle. I must say, I was somewhat disappointed after reading these responses.

Decreasing AR and Increasing AP are sort of Quick fix solutions and are aimed at a very very short term gain/relief. None of these methods are sustainable in long run. The reason in simple. First of all, there is a paradox in the approach. On the one hand we are trying to decrease AR and are talking about increasing the AP without realizing that our AR are somebody else AP. Give me one simple reason as to why that somebody else is also not working on improving his own cash flow applying same philosophy.

Improving cash flow is a tedious exercise and there cannot be any short cut approach towards same. Both decreasing AR and increasing AP entail hidden costs which at the end of the day hit bottom-line very severely.

Every since I embarked upon lean journey in one of my assignments, one think came out very clear to me, “Inventory holds the solution to almost all the issues management faces”. Here we are talking about inventory in broader perspective. Not just like Stock or work in progress. Here we are talking about inventory in the value stream. This may of may not be in shape of merchandise.

Any current state value stream map will highlight, besides other following four important components  a.) Motion, b.) Waiting, c.) Transportation and d.) Inventory. Each of these components will be present with or without value addition. To move from current state to future state in value stream, we need to eliminate all non value adding components.

Inventory however remains a component where it is almost impossible to imagine any value addition stream. This inventory will be within or between the processes and will consume critical resources resulting in blockage of working capital.

On a financial report, inventory sits in form of Merchandise in process. A more drill view of inventory is Inventory + AR. In value stream map, however, inventory refers to queues of information, paperwork, electronic files, or project work in-development. More often than not, cost of inventory in VSM will be much higher than cost of inventory held in form of merchandise/AR.

The way to have a sustainable improved cash flow is to work on these inventories. This is time-consuming and intellectually taxing but definitely more rewarding and the icing on the cake is sustainability. Reducing this inventory will mean improved throughput, better yield, faster delivery and greater amount of customer satisfaction.

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About bsbasan

Professional with over 20 yrs of experience managing business. A strategist, A thinker and an innovator. Experience in cross sectional functions in various industries like Chemicals, Apparels, Retails,Hospitality, Construction, Manufacturing, Services. Proven experience in Business Development, P&L,Finance, Risk Management, Strategic planning and organizational transformation. 20+ years record of success managing corporate finance & business operations for growing manufacturing companies with multistate and international operations. Made break-through improvements in business processes utilizing lean methodologies and Six Sigma principles. Currently designated as Chief Executive Officer of Texport Syndicate India Limited
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2 Responses to Improving Cash flows – Inventory is the Key

  1. Raju Thomas says:

    Are AR cycle and AP cycle different? or is it business cycle? We need innovation for managing AR (time period or ceiling or anything else). AP becomes huge opportunity when we work upon inventory through VSM. How fast you can convert AP into AR and innovate on AR management. Process innovation and Management Innovation). In nutshell, working capital will depend on the speed with which we convert AP into AR. Sadly, working capital is used for filling the gaps in the value chain (AP to AR). The challenge of a CFO is to make organization literate aboute it but in most of the organizations accounting people make it ‘rocket science’ and project it as ‘black box’. Like HR, accounting is everybody’s job.

    • bsbasan says:

      Bang on Raju. AP and AR cannot be looked upon in isolation. The quality with which the complete cash to cash cycle is managed will ultimately lreflect in working capital gap. Hugh opportunity exist here….

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