"Just because you think, 'I have this under control—I don't need to hear anybody else's perspective' does not make it true. It's quite often the opposite."
T. Harv Eker
I looked at a business owner's financial statements recently and asked about their inventory balance. The question was "Inventory seems high to me. What's your general rule for how much inventory you keep on hand?"
His answer was they place orders weekly so they don't have to keep a lot of inventory on hand. My follow up question was "About how many days of inventory would you say are on hand"? His answer was less than one month.
But the financial statements showed about 55 days of inventory on hand.
That peaked his interest. His focus for the next day was going to be spending some time with his warehouse manager in order to better understand how inventory was being managed. And whether they were holding too much inventory.
Reducing inventory from 55 days on hand to about 30 would free up enough cash to fully pay back the loan the owner had made to the business a few years earlier.
Questions = Money
There are benefits to having a person you trust, and who is not in the business day-to-day, ask some questions about why some things are the way they are in your business.
- Your gross margin seems low even though you raised prices recently? What is causing that?
- Your revenues are growing but your profitability is lagging. What is keeping you from making more money?
- How much cash will you be able to distribute to owners this year?
Find someone you trust and encourage them to review your financial results and ask some tough questions.
Good questions can be very valuable in your ongoing work to increase profitability and cash flow.
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