The credit crunch is on everyone’s mind these days, from individuals looking to purchase homes and cars to businesses trying to acquire new equipment. Small businesses, often directly owned by individuals, can be the most affected. Does it have to be so hard to expand?
As we move into 2008, the U.S. economy is slowing down and the debate among economists seems to be whether we are going to experience a recession or just a slowdown in growth. The sub-prime crisis and tightening credit markets make it more difficult and more expensive for companies to raise capital, so what can a manufacturer do these days to finance necessary growth?
How else can you raise capital?
Companies that follow a continuous improvement agenda have discovered a ready source of capital to finance growth: harvesting cash tied up in inventory.
The lean way. And of course that requires a change of mindset.
As those involved in continuous improvement will tell you, it’s not just a matter of delegating it to your manufacturing folks to implement lean tools. A sustainable commitment to reducing inventory — including raw, WIP and finished goods — is really a commitment to change the way you do business and it affects almost all of your business processes. Some people look at inventory as necessary for customer service, but customers don’t care if an order is filled directly from your manufacturing operation or from a warehouse, and it’s more cost efficient shipping directly from operations.
Which blows down to fundamental changes in operating philosophy.
As many companies have discovered, the journey can be well worth it in reduced costs, generation of cash for growth, improved customer service, higher quality and the ability to compete in global markets. Your production operations have to become flexible to produce small batches — down to lot sizes of one in some cases — to be able to manufacture exactly what your customers want, when they want it and in the quantity ordered as cost effectively as your old batch operations.
Your supply chain also needs to change to be able to deliver materials and components in the exact quantity required and when your operations need them. Even your distribution channels need to change to move from a build-to-stock business of standard products to a build-to-order business that allows you to customize your products to specific customer needs.
And last but not least, your traditional financial books may not exactly reflect the operational improvements, at least for a while.
Your CFO should also be involved with your continuous improvement strategy because they will see things happening to your income statement like increasing cost of goods sold, reduced margins and profitability as inventory of work-in-process and finished goods are reduced. Even though cash flow looks much better and the need for borrowing working capital is reduced, it has some short-term negative impacts on your conventional accounting P&L, and your CFO needs to know it’s coming.
That last part can really be a barrier with public companies stuck in a traditional accounting mindset. But cash is a concept that any CFO will understand, and when more of it eventually shows up on the balance sheet, their eyes will light up. And finding a new line of credit may not be necessary.