WORKING CAPITAL

What Should Manufacturers Be Doing Right Now about Working Capital?

That depends, doesn’t everything? If your firm is a company making products for export, for example simple medical devices used during routine examination in developing countries, you will be doing something different than a firm that supplies, for example, the US automakers with bumpers for SUVs.

The difference has to do with the near term future demand for your product and its shelf life. In the case of the medical device firm you are probably focusing on honing your manufacturing costs, expanding your inventory, improving your efficiency, and stoking your sales force or distributors to sell as much as possible. If you are making bumpers for US made SUVS you are looking at ways to reduce your inventory, cut your manufacturing costs to the bone, and potentially looking at how you can maximize your cash flow in the short term to, well, just survive to the end of the year.

The way you manage in each situation is very different, but certain skills cut across both scenarios. The words “control your use of working capital” summarize the sameness of each position. In order to make your company successful you need to know how to control the use of working capital, when to use more and when to conserve it. Net Working Capital is the difference between Current Assets and Current Liabilities, but operatively it also includes the funds that the owner has, or can put in the business, as well as the amount of credit that the business might be able to get from other outside sources including the vendors or suppliers to the company. While the classic definition is a very sound way to look at Working Capital the more inexact estimate that takes into account the access to capital that the owner and the supplier represents is key, particularly if you are the SUV bumper manufacturer.

The less working capital needed to complete a sales cycle, including creating the sale opportunity by having the right merchandise the customer wants is what you are aiming for.

Writing this seems simple but I have to say that figuring out how to pull this off is an inexact science. There is also a cycle to the use of the capital that roughly equals the selling cycle. Its length and intensity dictate how you manage the company. Usually longer cycle times are rewarded with higher prices and fatter margins but that is also not always true.

Many business owners make the mistake of confusing the making of a profit and the resulting retained earnings for working capital. The confusion is understandable but dangerous. It’s almost a law that as a business expands its demand for working capital increases. Those funds have to come from somewhere. There are very few businesses where the growth of the firm is additive to the excess working capital, which ultimately represents the cash flow that is the driver of success.

There are two that come to mind. The first is Wal-Mart, because they are very efficient and can sell their merchandise before they have to pay for it. Second is Dell Computer who, at least in the early years, made a computer very fast after the customer purchased and paid for it. Both of these companies occasionally had negative working capital needs during growth. For the rest of us we need to seek out the additional capital to grow while at the same time squeeze as much out of each dollar we have. This is done by controlling our inventory, collecting our money for the customers promptly, and selling for as high a price as we can get for our merchandise.

For help with Working Capital contact:

info@bisonmgmt.com