“The strategic
Potential outcomes in response to this intelligence gathering will be as follows –
1) Do nothing, as your business perfectly aligns with the market and customer’s needs;
2) Modify the order fulfillment process;
3) Alter products and services offered; or,
4) Combination of 2 and 3.
As most businesses have a limit on financial resources available, a product or process investment will require an adjustment or elimination in the current offerings of your company, i.e. a reallocation of your working capital.
Periodically every business should review its product lines and services, to understand the profitability generated. The natural result will be an emphasis on the most profitable activities; while de-emphasizing the less profitable or money loosing activities. Through this exercise, you will quickly identify problems in products and service fulfillment. You will also begin to analyze the value of your largest customers. You may notice that certain customers are not as profitable as others, potentially requiring you to change pricing.
For example - In an organization where I was employed, we reviewed credit products every other year. How were these products performing? Was usage as expected? What were competitors offering? These products were portfolio products, and a certain allocation of the portfolio was held exclusively for the product being reviewed. If we found that the product was no longer in demand, it would be canceled, to free up capital within the portfolio for new credit products.
This strategy will help you understand if funds are being allocated properly to support the most profitable endeavors.
Interestingly, based on a recent survey conducted by American Express and CFO Research, working capital for mid-size businesses will be obtained through an emphasis on receivables – “In a survey of 275 senior finance executives at companies with $4 million to $2 billion in annual revenue, 38% said that receivables performance would be their top priority for working-capital improvement over the next year, compared to 34% who cited inventory
These survey responses from the CFO’s are counter to what has been disclosed in the press. Large customers have recently adopted a strategy of paying vendors within 90 to 120 days, benefiting from the use of the vendor’s cash. Note my recent blog posting - The New Cash Management Approach – Pay Slower (http://cfotips.com/?p=513)
Alternatively, if re-allocating cash resources are not an option, you may need to consider factoring receivables, acquiring a bank loan, issuing a debt offering or issuing an equity offering, to finance your growth.