In a time of inflation and supply chain disruptions, there will be many who will be tempted to stockpile inventories to avoid higher prices and stock rationing from suppliers. But there are many risks with taking such an approach.
Draining Company Cash Reserves
The first is that you may be draining your company’s cash reserves in an economic climate where money supply is tightening due to central banks raising interest rates, increased liquidity holding requirements of banks and a general retrenchment from risk by commercial banks trying to avoid future bad debts.
“Ghost Demand”
The second is the risk of “ghost demand”. Sales projections tend to be optimistic about the future. What if this projection of increased demand is not realised? Then you may be left with a lot of inventory that is unwanted by the market-leading to significant losses because of stock write-offs or deep discounting to clear warehouses. If you intend to take the risk of deliberately increasing inventories in this economic environment, be sure that there is enough cash to cover any potential loss. It should be remembered that companies don’t fail because of bad ideas or a missing a revenue target. They fail because they run out of cash.
Enron, Carillion, Parmalat, and many others went to the wall ultimately because they could not pay their bills and took financial risks that turned out to be extremely reckless. That is not a list that anyone wants to join.
For those who do not have endless reserves of cash, it is time to knuckle down and do the boring stable things well and sharpen up on risk assessments.
What Happens Next?
The biggest challenge is trying to forecast what might happen next. Banks call this stress testing, but companies should do this too. Model what would happen to your cash flows if something unexpected was to change. And model several scenarios, however unlikely they might seem at this point. Then you have a much better chance of surviving and prospering in our crazy world.
Here at Expense Reduction Analysts, we’re working with many major businesses over the last few months, helping them to consider their cash flow cycle and unlock material sums of working capital previously trapped in the supply chain – and quickly.
We Can Help
The best news is that our analysis is both free and non-invasive. Our data-driven approach means that we can pinpoint the exact opportunities of your working capital without disturbing your organisation. Answers are based on facts and not anecdotes. Opportunities are identified and the path to execution is established to realise reduced working capital and reduced cost of financing.
Please contact us and we will be happy to deliver quick results that will start the path of working capital reduction.