Your CFO to the rescue: Solving the mystery of cash flow – Part 8

Let's continue our discussion on how to manage and maximize the key drivers of cash flow in your business.

This seven-step review is a methodical approach to putting focus on the components of cash flow that can pay huge dividends for the company.

I'll recap steps 1 and 2 first.

Then I'll go into detail on step 3 – focusing on the cash you have tied up in inventory.

1. Understand the Peak and Trough Cash Months

This concept is all about helping you avoid the single biggest mistake executives make in managing cash flow.

2. Accounts Receivable Requires Constant Attention

I have written a number of different posts about how to manage accounts receivable when you are the CFO or the entrepreneur.

• I have seen many times in my career where a consistent focus on DSO (days of sales that are sitting, and oftentimes stuck, in accounts receivable) by the management team helps drive accounts receivable down and frees up much needed cash for a business.
• Collecting receivables, especially from large companies, can be much more effective when you shift your mindset from "collecting" to "expediting".
• The accounts receivable aging report is a great tool for your staff charged with turning accounts receivable into cash. It's also a great management tool for you. It helps you manage your receivables and how well your staff is performing their job.

3. Inventory Can Hurt You Real Fast

Inventory may be one of the biggest money pits in your company. It's amazing how fast money is lost in many businesses because the owner and the CFO are not maniacal about controlling it.

Inventory can be a very fickle asset. One minute it's your best friend. The next minute it's your worst enemy.

What usually happens is inventory slowly builds during the year.

The slow or non-moving inventory gets pushed aside and management can't see what's happening because they are focused only on the income statement.

They are seeing the cost of goods sold every month.

What they aren't seeing is the cost of what's NOT sold.

Eventually though, reality raises its ugly head and management does the work to dig into the detail, figure out what's bad, mark it way down, take a big inventory write-down that flows through the income statement, then get rid of the old stuff in an attempt to salvage at least a little bit of the cash that was used to buy it originally.

Do This…

Here are four smart steps you can take to monitor your inventory today.

1. Print a listing of your entire inventory by date purchased.
2. Depending on how your operations are set up, take a walk and physically look at all the inventory you can.
3. Make an honest assessment of which inventory items are damaged, worthless or obsolete.
4. Write off worthless inventory and write down inventory that is damaged or obsolete.

Go out today and touch every item of inventory you have.

Imagine as you touch it that every item of inventory is cold, hard cash.

Ask questions about anything that looks old or has been around for a while. You will get people's attention when you do that.

And you should even consider putting additional controls in place at the point of each order so you can personally learn how well your staff is buying.

That's the point in the process where you can save yourself loads of cash and avoid big write-downs in the future.

An Eye-Opening Experience

Not only will you discover some worthless inventory you need to write off and get rid of, you will also be reminding yourself how important it is that you manage your inventory very, very closely.

In many businesses managing inventory properly is the difference between being financially successful or constantly struggling just to make payroll.

Use this process to stay on top of your inventory. Also make sure you and your leadership team manage this asset with the care and attention it deserves.

You will create a more prosperous and successful company in the process.