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Improve Cash Flow With Good Management Decisions - Sep 6, 2010

Posted by: Stephen H. Mangelsen in Articles

A $10Million company was able to increase cash flow by $1 Million by eliminating their stockroom and workorder accounting.

The company collapsed raw material and work in process inventory to raw material in process. Component parts were received directly to the production floor. Using the 80-20 rule, 80% of the parts were expensed when they were received and reordered using a 2 bag system. Component parts not expensed were added to raw material in process inventory. Component parts in finished goods were backflushed via a bill of material consisting of the 20% expensive components to relieve inventory when finished product shipped. Accurate inventory was maintained through normal cycle counting, but only on the 20%.

The company worked with all of its suppliers to become a just in time company. Product was assembled and shipped the same day. Finished goods were then reduced to zero and overhead expensed as a period cost.

The result of these management decisions was the reduction of $1 Million of inventory control and work order accounting expenses. And a big bonus was the elimination of the closed order variance time bomb.