How to Increase Cash Flow without Laying Off Employees-Part 1

The natural tendency will be to reduce staffing levels when we are allowed to go back to work. This is the first part of a four-part series that will share a proven better way to increase cash flow.

If we are a $25M company with a gross margin of 36% like in the example above, our COGS is $16M.

Keeping 76 days of inventory that means we have 3.3 inventory turns. 250 working days/76 days of inventory = 3.3 inventory turns. Since we have 3.3 inventory turns that means we carry about $16M/3.3 turns = $4,840,000 in inventory.

If our direct labor cost is 14% of our COGS, our direct labor costs are $16M x .14 = $2,240,000.

Since we are trying to save cash, let’s look at the impact of reducing inventory or labor by 20%.

Inventory = $4,800,000 X .2= $960,000

Labor = $2,240,000 x .2 = $448,000

Our savings are greater if we can eliminate the inventory investment by 20%. After eliminating that inventory, we now have 4.1 inventory turns.

What would happen if we could get to 12 inventory turns? Our inventory investment would be $1.3M. Which is a savings of $3.5M over the original $4.8M inventory investment. For mid-market and SMB’s this is a realistic target.

How do you free up that cash without having continual shortages? One of the most effective ways is to implement pull systems in your business. Also called Kanban systems, these are fantastic for minimizing inventory investment and ensuring that you don’t run out of parts to keep your business running.

This blog is the first of a four-part series that will educate you on these powerful tools and how you can deploy them in your organization.

In the meantime, here is an article from the Cincinnati Post in 1998 talking about this technique. I deployed it within a family-owned crane manufacturer, and it helped them successfully weather the 911 crisis. Here is the link.

Next week, I will discuss how to get started using this powerful method!

As always, it is an honor to serve you and I hope that you and your company are getting better every day!

More show notes are here