Starvation vs Indigestion

By Martyn Shiner | May 10, 2019

Last week I retweeted….

When I saw the original tweet by @allonriaz I retweeted with the comment:

Perhaps this is another way of saying “You can’t grow your way out of a hole” … which is Rule #1

My Take

The comment I posted is a reference to Rule #1 of the Manifesto for Business Improvement. Having considered this a little further I thought I could expand my thoughts on this and how they relate to SMEs in general.

From Clive’s original post:

The instinct of most manufacturing CEOs/MDs when the business is struggling and cash is tightening will be to attempt to boost sales to alleviate the crisis. This inevitably involves chasing new customers, new contracts, and often new products or variants. Invariably this will have the opposite to the desired effect because in most companies the result will be an increase in inventory and an associated deterioration in cash flow.

But why is this?

Chasing Volume is not the answer

More Sales = a better bottom line…… or so the conventional wisdom goes. But an increase in sales necessarily drives up purchasing activity AHEAD of sales delivery which, if throughput is constrained will lead to increasing stock.

Typically, a manufacturing/trading business, as opposed to a service company, has a cash cycle of 60-90 days. So if you turn your stock every 6-8 weeks (45-60 days), your debtors pay you on time at the end of the month following date of invoice, so average 45 days from sale, and your creditors insist you pay 30 days from delivery (and you are paying to terms) you would have a funding need of 75 days.

So the working capital facility of a business with £1.2 million turnover and the above profile would be £240,000.

Are your metrics this good?

Jack the sales up and you risk sucking more stock into the system, plus increasing other costs - this will push up the cash requirement to pay employees and creditors ahead of receipts from customers, putting working capital under severe pressure - the indigestion mentioned in the tweet.

Possible alternative courses of action - “Shrink to survive”

There could be a few ways to do this:

  1. Turn away new business - obviously this is one course of action. This can lead to problem in customer relationships going forward especially if handled the wrong way. In addition, new contracts may be at better prices than current or possibly higher value in the longer term.
  2. Discontinue unprofitable lines - making finite resources earn more can be done by focusing on the most profitable products or streams - which may not be those that you assume are the most profitable.
  3. Put up prices - if you have an excess of demand over your capacity to supply, then perhaps you are pricing too cheaply. Putting up prices can choke off demand in areas where you have constraints. And elasticity of demand means that you might be surprised

Options 2 and 3 highlight a big area overlooked by many businesses - Margin Management. This is often overlooked as a way to improve profitability and can really help to zero in on where the best performing products or contracts are.

There’s obviously a lot more that can be done, but getting the above right may prove to be the Antacid that your company needs to improve things in the short term.

How can uzERP help

If your business has a strong case of indigestion, here are some of the ways uzERP can help:

  1. Customer order book - uzERP can track your sales order book by customer and item with due dates promised and latest estimated delivery dates. This is essential information if you want to be able to keep current and prospective customers updated as to when their orders will arrive.
  2. Service level reporting - 100% OTIF (On Time in Full) delivery is the target…. how are you doing against this ideal and, more importantly, are things getting better or worse is vital information. uzERP can track ACTUAL delivery performance and allocate failures to categories for reporting and analysis as to why failures occur.
  3. Purchasing control - the indigestion metaphor above also suggests that companies take in more stock than than they can process - this leads to operational problems as physical stock builds and financial pressure as cash flow worsens. uzERP can show you what purchase orders you are expecting allowing action to reschedule ahead of delivery.
  4. Margin reporting - uzERP is able to collect information on you sales MARGINS by product, category and stream - this can be done as enquiries/orders are received, as well as when goods are despatched, allowing you prioritise the most profitable business.

And finally…. if you want to know more about how we can help you improve your business through better systems and improved information then do please get in touch via the Contacts Page.