From the Lionesses of Africa Operations Dept
The Head of Finance (HoF) waltzed into the office this morning and called us all together. “Time to come down from the incredible high of the VW Lionesses Den and crack on with our Business Unusual take on business in difficult times! So let’s look at one of my favourite topics! - Crisis Transformation.”
…unsure and slightly nervous as to why there should be a beaming smile accompanying this dramatic announcement, we took our places in the Board Room.
“There is no doubt (the monologue continued) that all our Lionesses will be feeling the impact of CV19 (the HoF does like his abbreviations). Either through a Demand shock, but even those with a Supply shock may find that their invoices are being ignored and cash is simply not being turned around fast enough. You wrote about those shocks (here) previously and gave some excellent practical steps for saving and protecting cash, which I am not going to repeat, because in this edition of Lioness Weekender I want you to take it to a whole new level.
This speed of money around a system or economy is central to our lives. Much like the blood rushes around the body bringing essential oxygen, so cash does the same in a company or economy. Indeed many Governments have had to resort to handing out vouchers, or giving discounts at point of sale to their people to speed up this spending (often described as ‘Helicopter Money’ - i.e. thrown out of a Helicopter straight to the population below to spend immediately), rather than in the usual way, release money into the Banking system, which often (especially during dark times), goes to building up the Banks’ own Balance Sheet, rather than flowing quickly through to the population at large.
This is what we need our Lionesses to think about every time they order from a supplier/factory. Not only ‘can I afford it?’, but ‘can I hold my breath long enough for the cash to return?’ (one hopes with a profit), but it is this holding of the breath until the oxygen returns into the bank account that is the most dangerous time for businesses currently.
There is no doubt that we are in a Global Crisis, so how do we transform ourselves during these dark times to speed up this flow of oxygen and then grease or rebuild our engine room so that it is fast, efficient and nimble?
This is the start of Crisis Transformation.
Checking that we had all put our phones on record and hopeful that the coffee buzz the HoF was clearly enjoying will last, we relaxed in our seats safe in the knowledge that our Weekender Blog was being ‘written’ for us.
“Is this Evolution or Revolution?”
We awoke with a jolt, but happily this was a rhetorical question as the HoF simply continued in full flow, so we relaxed once more.
“Firstly as with any Transformation there must be an aspect that gives a quick result to turn the non-believers and to bring more support in on the process. Ultimately this should be a quick and easy win increasing Profits, such as a cut in delivery costs or a reduction in overdraft fees or, and this is often a major problem in so many businesses, wrong deliveries. For Cash, this is speed.
Transformation sounds shocking, dangerous and nerve racking, but if you look at Evolution first it doesn’t have to be…”
With that the HoF left and with this exit, our hopes of a relaxing day with little to do disappeared!
So turning to the HoF’s dramatic question, Evolution or Revolution? We start with Evolution - make better what you have (Darwin perhaps said it in a more scientific way!).
Wrong deliveries.
Goods sent out and have to be returned - what a destruction of profits, yet no matter how much you ask your warehouse staff to be careful, it still happens. The problem may lie not necessarily in your warehouse staff as they collect from the racks and send out, but far earlier in the process…
Solution? Get your hands dirty.
The HoF talks lovingly of the 40 foot containers from Pakistan and India he helped occasionally unload whilst CEO of one German group - dusty, hot and dirty work, but his excitement came from seeing and then improving the process. Next time there is a delivery from your suppliers, get involved, you’ll be amazed at what is going on (not through malice, but through attempts by your staff to be fast they lose efficiency - this is often where problems start).
Problems:
1. Speed. Warehouse staff want the goods into the warehouse rack as fast as possible, while Sales staff want to grab those items sold and promised to customers for the past week and have only just arrived…
Result. Not enough time to properly check in the goods before they go out. Chaos for your system. Two weeks later you will be looking for a ‘size small’ that your system says is there, but simply cannot be found - that problem was caused on Day1…
2. Bar codes on the side of the boxes may not actually reflect what is in the box itself (time for a serious call to your supplier), but this happens, again this is not usually through malice (because sometimes you may receive higher value products - do alert the Factory each time - they need to know that you know and are watching!), it is often just a mark of too much speed and not enough haste in the factory.
3. Packing away on the racks. With a 40’ container the warehouse staff will expect 50 Smalls, 80 Mediums etc in a box, if your factory has thrown in a few Large into that mix without listing them, they will find their way into the Small and Medium racks, guaranteed! Next delivery? You guessed it - These are the ones eating into your profits as returns arrive and the wasted delivery back and out again has to be paid for.
4. Wrong labels of course really mess up your system. A Small with a Medium tag and bar code? Not fun.
All of these things you will discover if having seen a large cost of returns, you spend a bit of time in the warehouse. This is money you simply cannot afford, plus upsets your customers and makes you look daft, careless or worse, incompetent. This is an easy win for Profits.
So onto Speed of Cash.
This is all to do with the CCC (Cash to Cash Cycle Time), Days Inventory Outstanding (DIO), Days Sales Outstanding (DSO), and Days Payable Outstanding (DPO) because these are your cash metrics. This is where your cash is sitting. This tells you where there is a blockage in the arteries.
Sales people want the easy sale (as you do too), but in dark times when Cash is precious, your ordering of new supplies must be heavily controlled. Sales Teams want to just walk into a Warehouse and find it stocked to the roof. This is not the time for that. Of course you have to gauge what is really needed and those items that move fast (have a low DIO) will allow you to have more faith in your ordering, items that linger long in the Warehouse and are expensive should be purchased only when your Head of Sales is on the ground in tears and begging for them.
This is why these metrics are essential. If you have not worked out what Product DIO vs Profit AND Product DIO vs Cost (because we are looking at how long you can hold your breath, so an investment with an expensive Product that does not move is going to be very painful) by now, then time to pour a coffee , sit down and work it out. Make an easy to see chart with one axis, Product DIO and the other Axis, Profit or Cash.
The results may shock you. The American mathematician John Tukey, a devotee of charts, once wrote that “the greatest value of a picture (chart) is when it forces us to notice what we never expected to see”. There slap bang in the middle of the ‘hard to move, high cost’ will be the trophy product that your Sales Team love…. “DOH” as Homer Simpson would say!
We have discussed previously DSO and DPO here, but what not mentioned then and is little considered is the difference technology makes on the collection of invoices.
Strangely it has been found that just by using technology helps dramatically.
As much as we try we cannot control when a customer pays, the only thing we can control is how we ask for payment. So, much like the packing and delivery problems above, so invoice mistakes are a Profit and Cash Flow killer. Any mistakes made in the invoice will result in the customer questioning and delaying payment (and once more make you look daft, careless or worse, incompetent) and will ensure your accounts staff spend far too much time in sorting them out. ‘Time is money’, remember.
This is an important place to automate. A survey done recently by APQC has found that those that “…invoice 80% or more of their invoice line items electronically or automatically have a significantly lower DSO (30 days) than survey respondents that invoice 20% or less of their invoice line items electronically or automatically (55 days).”
That is a crazy result, just from the automating the process you cut both time wasted by your accounts staff and speed up payment? Talk about a serious win!
…and yes, we are seriously suggesting that you invest in automating processes during these dark times. CV19 has accelerated technology spend across the globe. Those that have been nimble are surviving and in some cases thriving, those that are stubborn to change are dying a death of a thousand cuts.
However, you probably have a decent automation process in the accounting package you already have. So much cash is wasted by not fully utilizing what you already have. That is Evolution.
So think Evolution (which is calmly making better what you have) first for this rather than Revolution (dramatically finding something new).
Next week we shall look at further issues and quick wins within the CCC.
Stay safe!