It is often amazing what BFOs can pour from your business’ books. Just one example:
A small manufacturer of industrial soaps contracted me to convert their books from Peachtree to QuickBooks, and review and refine their Chart of Accounts, and Vendor and Customer lists. The program that translates from the old software to the new is far from perfect, so the books need to be compared and reviewed after the process. In this case, there was a particular number that stuck out like a sore thumb … the supplies inventory was nearly $700,000 – in a business that had only a touch over a million dollars in annual sales. I reviewed the Peachtree history, and it seemed consistent, so I talked with the owner. In fact, the figure was correct because he had taken advantage of a sale – TWO YEARS EARLIER! A review revealed:
The good news was that he had saved 20% on the supplies.
The bad news was that:
(a) his appropriate inventory was under $10,000, so he had tied up, on average, over a million dollars in cash for two years to save that 20%;
(b) he needed to pay a full-time forklift operator to move these materials around so he could access the supplies he actually used on a regular basis; and
(c) he determined that far more than 20% of the supplies would exceed its shelf life long before it was used, and he would have to dispose of it – and, to add insult to injury, PAY for the disposal.
We devised a plan-of-attack in which he modified some of his formulations in order to use more of these “bargain” chemicals, and he had his office manager contact clients to offer them special pricing on the soaps that used these materials. During the next year, his direct costs were reduced by 18%, and his inventory diminished by almost $500,000. This left him with over $600,000 in unanticipated positive cash flow. That, in turn, allowed him to make early prepayment on a commercial loan on which he was paying 8% interest. It is probably obvious that there were many other spin-off benefits as well.
There’s more to bookkeeping than simply keeping books. It’s Reading the Stories that Your Books Tell that helps you strengthen and Grow Your Business.
