Why Managing Cash Is Important

For a company to keep growing, it must handle its cash properly, not just increase sales. Take Owens Inc., a fictional company that makes electrical equipment. It realized its payment terms were too easy for customers. Its internal systems were also complicated, which slowed down billing and made it harder to collect money.

Owens grew fast by taking risks and increasing sales, but it did not manage its inventory well. It started big projects but struggled to predict cash flow and pay for them. At the same time, many customers delayed payments and ignored the agreed-upon terms. The CFO even said the company was acting like a bank for its customers. Although the CEO once said "cash is king," this idea was forgotten as the company expanded.

Companies can manage sales and clients better by grouping customers to understand how much it costs to serve each type. They should use a clear credit-check system before accepting new customers and regularly review existing accounts. Good practices also include tracking orders and invoices, like checking how many are paid on time. For collections, teams can set clear goals for staff, and for payments, businesses should move away from slow paper checks and use faster digital payment methods.

Procurement Decisions and Their Impact

The choices made by a procurement team directly influence a company's financial position. At Owens, the "procure-to-pay" process includes:

• Sourcing strategy: Planning how to choose suppliers and regularly checking how well they perform.
• Supplier and contract management: Discussing prices along with payment terms and conditions to secure the best overall deal.
• Receiving and payment control: Using purchase orders to properly record and track each transaction.

The procurement team works under heavy pressure, so it may overlook how its decisions affect the company's cash flow. Factors like lead time, minimum order size, and delivery speed can tie up money. Payment terms and how often payments are made also play a big role in the company's cash position.

Why Inventory Problems Happen

At Owens, the VP of operations said each department has its own goals. If they don't work together, inventory can grow too much, as it has in recent years.

The purchasing team focuses on getting the lowest price, but this can cause problems. For example, long delivery times or buying in large amounts can lead to too much or too little stock. Also, they may treat suppliers just for transactions or get too comfortable and keep doing things the same way.

Marketing and engineering can help by checking which products are no longer in demand or are not making a profit. When adding new products, they should make sure people actually want them and avoid small changes that only increase costs. In logistics and warehousing, trying to give better service often means keeping more stock.

Keep Inventory and Costs Under Control

Logistics helps businesses store, pack, and deliver products to customers. It is important for inventory management because it affects costs, delivery speed, and the amount of money available to a business. Changes in customer needs, fuel prices, technology, and government rules can make logistics more difficult.

For example, during COVID-19, online shopping increased greatly. Many businesses had to change their delivery methods and send goods directly to customers instead of supplying shops.

Businesses face several challenges in managing logistics, including global trade, changing customer needs, and environmental rules. These changes can affect inventory levels and daily operations. Logistics affects inventory and business costs in several ways:

• Packing and labeling: Different packaging needs may require more workers, increasing costs and delaying deliveries.
• New technology: Tools such as RFID help track goods, but they may require extra steps and training.
• Trade rules: Incoterms explain who pays for shipping, insurance, and other costs, affecting how goods are handled.
• Customer demands: Strict delivery promises can increase expenses if businesses offer too many special services.
• Warehouse management: Well-organized warehouses help goods move faster and reduce delays, allowing businesses to receive payments sooner.
• Connected systems: Linking order records with billing systems reduces paperwork and speeds up payments.

Good logistics helps businesses control inventory, reduce unnecessary expenses, deliver orders on time, and maintain healthy cash flow.

Manage Inventory in Manufacturing

Inventory in a factory includes raw materials, items being made, finished products, and maintenance supplies. While it is necessary, it can also lock up a lot of money.

Safety stock is the extra inventory kept to meet customer demand, such as achieving a 95% service level. It is usually calculated using past data. Companies should fully use planning tools to decide the right safety stock. For made-to-order products, keep very little stock. Businesses should also track goods in transit and try to reduce delivery time and order sizes. They can produce basic items first and add customization later if needed. Always monitor how much money is tied up in inventory to avoid excess or slow-moving stock.

Simple Financial Control and Inventory Management

A good financial controller helps a business handle its money and reports properly. They also make sure working capital is managed well. One key task is checking "absorption costing," where fixed costs are shared across each product made. This may lead managers to produce more items just to lower the cost per item. As a result, the business might create extra inventory that it doesn't need. The controller reviews this to keep production under control and manage costs properly.

A company's weighted average cost of capital (WACC) shows the total cost of using both loans and shareholders' money. If a company takes on more debt, investors see it as riskier, which can cause the stock price to drop.

Controllers should not depend only on short-term interest rates like the Secured Overnight Financing Rate (SOFR) when making cash decisions. Low rates can make money seem cheap, but they may ignore the higher cost of equity. They should also remember that good results in one part of working capital can hide problems in another, and a strong business unit can cover up weak performance in others.

Do Business Metrics Really Work?

Businesses use different ways to check their performance. But do these methods truly show how well they are doing, and are they connected to help make better decisions? Often, these measures are not linked to each other.

Businesses track key measures like inventory turnover (how often stock is sold in a given time) and cost per unit (the total fixed and variable cost to produce one item). These numbers are shared with leaders, and operations teams should use them to show how their work affects results. However, management and operations often rely on different metrics. This mismatch can happen due to poor data systems or because no one has checked whether the collected data is actually useful.

Leaders should use metrics that act as early warning signals, not ones that show problems after they happen. Many companies rely on numbers that are like a fuel gauge, only showing results later, instead of a speedometer that helps control performance in real time. Good operating metrics should focus on the key inputs that management needs to monitor. KPIs and bonuses should also be linked to cash performance. Everyone on the team should know their role so they can support and improve these results.

Cash Flow Matters More Than You Think

To stay strong, a business must focus on cash flow, not just revenue. Many companies ignore this and only look at sales numbers. As a result, they struggle when the market changes because they don't have enough cash to adapt or make necessary decisions.

Companies that manage their working capital well recover more quickly from problems and protect their investors' money better. Looking at the average daily cash balance gives a clear picture of a company's real financial strength, because it shows the actual cash available to pay debts, invest, or make acquisitions without any short-term adjustments to make the numbers look better.

Managing cash is important for service businesses like shops and hospitals, just like it is for factories, but the needs are different. For example, shops usually get paid right away when they sell something, so they don't have to worry much about money customers still owe.

As Owens Inc. moved ahead, it focused on two key things: cash and growth. The CEO met with stakeholders and leaders, shared the data, and made it clear that cash is just as important as growth. Without enough cash, the company could not move forward with its plans. After this discussion, the management team fully agreed and worked together to review decisions and suggest any needed trade-offs. Over time, it will become clear if the cash leadership team has successfully helped the company reach its goals.