Money is not the constraint, business policies are! And, the answers lie in common sense, not common practice.
“If only our CC limits can be extended”. “We can finish the project, but our vendor refuses to deliver anymore on credit”. “Let’s issue post-dates cheques, but ask the party not to deposit them without re-confirmation”. Do these situations sound familiar?
It is a less known fact that most bankrupt companies are actually profitable on paper! ”Profitable revenues” remains stuck in a balance sheet, leaving no cash to run business. We work hard, keep people engaged and use capacities efficiently. Yet money always seems to be in short supply, deliveries are delayed and we are caught between employees, vendors and customers.
And, we believe just pumping more orders and some cash will get us out of the mess. It is akin to pouring water into a leaking jug. Business is complex and it seems easier to add water or at least, crib about shortage of water, rather than finding the leak.
The starting point is to acknowledge that money issues cannot be solved with more money and so, cash is not the real constraint. When was the last time the business repaid a working capital influx in a disciplined manner? Money only gets stuck and lost. Business needs to generate the money…and it begins by seeking why cash flow is stuck and plotting systematically to retrieve it.
The challenge often lies in changing established mindsets. The business policies we live by block us from facing reality and taking necessary tough decisions. Altering these beliefs can give us dramatic and quick results – none of which involves pumping more money. Let’s deal with two common policy assumptions.
“Capacity should be fully utilized” is one such misconception. In common parlance, we know that working smart and working hard are different things and yet, it is almost a religion to maximize efficiencies all over. In reality, unless capacity earns us money right now, it is better left idle. Fixed costs remain fixed…but working hard on wrong orders produces inventory not money. It converts valuable raw materials into useless WIP and FG, till they are paid for by the customer. The book value, which is often used to borrow more cash, is the trap.
“Getting more orders will get us out of financial challenge”, is another quick-fix assumption. Often, this only pushes us deeper into the mess. In our haste and desperation, we pick orders at cost or low margins. Worse still, we offer terms that really hurt our cash flow. With low advances and delayed receivables, we finance wrong orders to keep our factory working, but not earning.
Solutions lie in common sense, not common practice. We should align each management action purely from a cash timing perspective and stop doing everything else. Stopping work unless we have the right shippable orders actually saves money. Strictly refusing wrong orders pushes sales teams to explore newer opportunities and take tougher actions which help in the long run. Similar assumptions can be challenged on policies relating to product mix, customer mix, order priorities, batch sizes, prospect qualification, et al.
The collective result is that we generate money instead of pumping it in…which is the goal of business. Money, like a river is best when it flows….we only need to un-block our minds to avoid stagnation. Sounds too simple? Well, let’s begin implementing and find out!