Today’s Economy

We can’t discuss inventory and supply chain in 2023 without first examining the 2022 economy. The economic landscape wasn’t always favorable, and this trend appears likely to continue. Supply chain disruptions and rising inflation that reached 8.3 percent in August 2022 have affected almost every business. Additionally, business owners are battling rising employee costs while facing a probable recession.

So how will all of this impact your business? Several ways emerge. Too much inventory can limit your business flexibility. Furthermore, purchasing excessive inventory that doesn’t move quickly will consume the available cash you need to operate your business. However, with supply chain concerns over the last three years, you don’t want to find yourself unable to obtain inventory either. Consequently, this has created a constant battle for business owners who feel they must “thread the needle” between these two extremes. To achieve balance, you will want to become comfortable with inventory and supply chain management and how they can serve as tools to help your business.

Understanding Inventory Management vs. Supply Chain Management

Supply chain management oversees the flow of products from raw goods and production sourcing through final distribution. In contrast, inventory management serves as an umbrella term for the procedures and processes that affect ordering, receiving, storing, tracking, and accounting for all goods that a business sells. Moreover, it’s crucial to know the right level of inventory to maintain. You should ask yourself these questions:

Manufacturing Strategy: Just-in-Time or Just-in-Case?

Are your inventory levels based on “Just-in-Time” or “Just-in-Case” manufacturing?

Toyota developed just-in-time manufacturing in the 1970s to help meet consumer demands with minimum delays. For example, manufacturers would order and deliver parts within close proximity of where they would need them in the manufacturing process. This approach worked well when products were easily attainable prior to the supply chain disruptions we have experienced since COVID-19 wreaked havoc worldwide.

Just-in-Case represents newer terminology that emerged due to supply chain disruptions. Manufacturers are now beginning to examine:

• Can they develop the parts/products they need in-house?
• Do they maintain multiple supplier relationships as back-ups?
• And are there domestic suppliers who can provide the product?

Active Inventory Review and Management

Are you actively reviewing your inventory movement on a consistent basis?

Who takes responsibility for managing your inventory levels, and have you provided them with the necessary tools and authority within your company to succeed? Additionally, do you annually evaluate poor-selling products that you manufacture and determine whether you should discontinue these items? Slow-moving inventory equals poor cash flow. If you struggle with this problem, now is the time to examine your business and decide which items you should stop manufacturing. Furthermore, if you can eliminate the bottom 10 percent of your manufactured products, you could potentially solve part of your slow-moving inventory issue.

Price Adjustment Strategy

How often do you evaluate your purchase costs to determine when price increases for products need to occur? The days of one or two annual price adjustments are over. To remain profitable and sustainable, you must proactively and aggressively push these price increases to customers. With items like lumber and steel, prices change daily, and consequently, you must be prepared to adjust accordingly.

Cash Flow Management Strategies

We know that inventory management affects your cash flow, so you will need to determine the optimal amount of inventory to maintain on hand. Here are additional strategies to help manage your cash flow:

Monitor Your Accounts Receivable

Monitor your accounts receivable closely. You don’t want to become the bank for your customers. During times when the economy begins to slow, customers start holding their cash longer, which means you receive payment later compared to when the sale occurred. When this happens, you must utilize other cash sources such as a line of credit to cover your business’s cash demands.

Develop a Strategic Payables Plan

Create a plan for paying your accounts payable. Do your ratios for A/R Days (how quickly you receive payment) align with A/P Days (how quickly you pay your bills)? Try to synchronize your outgoing payments with your customers’ incoming payments. This approach will help reduce your reliance on lines of credit and other financing avenues, which come with interest costs.

Control Owner Distributions

Control when and how often you make distributions from your company to owners. Instead, spread distributions out or time them for when cash flow is strongest.

Manage Your Banking Relationship

Maintain your relationship with your bank actively. Periodically use your line of credit to demonstrate you still need it. Furthermore, maintain the proper amount of leveraging to help with cash flow. Continue communicating with your bank representative and keep them informed about how business is progressing. Don’t hesitate to ask them for help when you need an increase in financing.

Evaluate Staffing Requirements

Evaluate your staffing needs regularly. Retaining all employees isn’t always possible when finances become tight. While it’s not an ideal situation, you should know where you need to reduce staff if and when that time arrives. A best practice involves ranking your team well before you have to make decisions about letting someone go. By doing this beforehand, you remove the personal element from the decision, which can make your choice more difficult.

Improving Cash Flow Through Strategic Actions

It’s not enough to identify your pain points. You will also need to know how to track your business cash flow effectively.

Key Performance Indicators (KPIs)

Know your Key Performance Indicators (KPIs) and determine which ones you will monitor. For example, Current Ratio, Inventory Days Ratio, Accounts Receivable Days Ratio, Accounts Payable Days Ratio, Capacity Utilization Ratio, Scrap Percentage Ratio, Customer Return Rate, and Lead-Time Ratio represent excellent metrics to monitor for Manufacturers.

Budget Preparation and Expense Review

Prepare a budget and review all expenses thoroughly. Additionally, continually update throughout the year—it’s not an annual exercise!

Additional Cash Flow Improvement Strategies

• Reduce waste: Consider the benefits of Lean manufacturing, which focuses on minimizing waste within manufacturing systems while simultaneously maximizing productivity.
• Renegotiate with suppliers: Furthermore, seek better terms that can improve your cash position.
• Offer early payment discounts: Provide discounts to customers in exchange for early payments.
• Accept multiple payment forms: Credit, ACH, and other electronic payment methods are critical for businesses. Not offering these options could force consumers to seek goods elsewhere.
• Be proactive with late payers: You will need to find the right person for this job—someone who remains firm and direct without being threatening.

2008 vs. 2023: Lessons Learned

Looking back at history, in 2008 when the last recession hit, many companies faced weaker balance sheets. They carried high debt leverage and weren’t prepared for these challenges. The difference in 2023 is that balance sheets are stronger, debt leverage is lower, and most businesses have learned from their 2008 experience. Consequently, they come to the table better prepared to learn from past mistakes, quicker to pivot or adapt, and with a plan in place for a possible recession.

We have a manufacturing team ready to serve the needs of your business. Reach out to us, we are happy to help.

By Dustin Raber, CPA, CMP, Principal (Wooster office)