A recent survey conducted by PriceWaterhouseCooper found that 48% of the CEO's from 1,200 respondent companies are "confident they will experience revenue growth".
As the economy begins to slowly rebound and economic activity begins to increase demand at your company, the subject of growth is a welcomed topic of discussion. It's been a while since most companies were required to plan for it. Business owners, managers, employees, etc. in several industries are becoming optimistic about increases in revenues after several years of decline. While it is imperative that we seize the opportunities that are created with an economic upturn, it is just as important to think about the results we want to achieve with the increased revenues. The natural tendency will be a rush to maximize any growth opportunities. The need to "make up" what has been lost in recent years will feed this tendency. The thought process of increased market share must bring with it increased profits and cash will drive companies to fuel new growth as fast as and as far as new opportunities will let them.
From a financial prospective, rapid growth can be just as devastating as negative, or no, growth. Without a viable financial plan in place, unmanaged rapid growth can drive a company to a unsustainable level of activity. This could result in the company's cash needs far exceeding the cash available to meet those needs (sounds dangerous, doesn't it?). Eventually, external forces will begin to curtail, or stifle, your growth. These forces exist in a variety of areas. For example, lender imposed leverage and liquidity ratios will begin to constrain the growth cycle. Or, vendors and suppliers may begin to limit your credit purchases. When these external constraints begin to slow your growth, you may be at, or have passed by, your tipping point. To grow effectively, a company must have a plan that considers a growth rate that is both obtainable and profitable.
Posted by: Robert W. Gittings in Articles
Mind your Work In Process - and MINE FOR GOLD
I was watching a news program the other evening and saw an interesting story about retirees panning for gold. Seems that when the market took it’s down turn, and with fixed income returns being so low, this has become a popular pastime to supplement their retirement income. They spend the day in the stream, searching for the elusive small nuggets, and sell them at record high prices. “It’s really hard work, I’m dead tired at the end of the day, but it pays off when you find an ounce or two” stated one Senior gold miner.
A few days later, I was speaking to a friend of mine. He is a controller for a manufacturing company, and was in the middle of costing out his year end physical inventory. Between raw materials, work in process and finished goods, he was close to “that point”. That’s when your eyes blur, you struggle to focus, and you feel like you could lie down on the floor and get a good 4 hours of sleep with everyone stepping over you to get to the coffee pot. He commented to me “This yearend inventory sure is hard work, but it is really worth it. We get to find our mistakes for the year, good and bad”
My first thought was, funny how hard work always seems to pay off. Then, I started thinking about the yearend inventory fallacy. Find your mistakes for the year the following January? Who can afford to wait that long? There are gold nuggets that can be turned into cash in your inventory all year long. The first step is to get your company on some hybrid of cycle counting. You find nuggets early in the game by plugging these cash flow leaks. And, you can address inventory control mistakes, and possible theft, when there is still time to fix it.
But, quantity counts are only part of the problem when it comes to inventory losses. The area I like to focus on when evaluating a company’s inventory processes and procedures is in the element of Work In Process (WIP). That’s where I like to pan for inventory gold.
It doesn’t matter if you are in manufacturing, construction, food processing, assembly, health care, etc. If you are taking a purchased item (raw material, components, and pieces parts) and adding value with labor through a one or multiple step process, you will have WIP to be concerned with. The problem with WIP is that it has inherent issues that lead to a cash drain on your company, typically without raising the red flags until after the fact. And if you wait until the end of the year to find out your problems, the money is already gone. With proper best practices, it could have been saved along the way.
Here’s the issue: materials, labor, and other expenses flow into WIP. Typically, companies have sufficient inventory procedures set up to track the raw materials before they enter the process and the finished goods that flow out of WIP at the end of the pro....