Investigation Unravels Mystery of Disappeared Funds in The Supply Chain DetectiveTM Saga!
In a bold move, the company embarked on an acquisition journey, acquiring a new business with complementary technical capabilities, a broader geographic footprint, new customers, and accretive profitability. However, the acquired company was facing a significant challenge – a lack of cash flow management and proactive cash management understanding among its employees.
Upon taking over day-to-day management, the CFO and the individual immediately set to work, tightening the process controls for Accounts Payable to ensure timely payments and instituting a regular Cash flow management and reporting review process. A plan of attack for Cash flow management was laid out for the team, and a series of actions were implemented to reduce inventory lead times, minimum order quantities (MOQs), and improve inventory turnover.
The Supply Chain approach proved instrumental in identifying problems and creating tactical and strategic plans to solve cash flow issues. An analysis of Account Receivable and Accounts Payable terms was initiated to identify misalignments, with Accounts Receivable terms found to be longer than Accounts Payable terms, causing cash flow issues.
To address these imbalances, the team worked diligently to improve the efficiency of Accounts Receivable and Accounts Payable processes, which had been inefficient or nonexistent before the acquisition. This effort was accompanied by a dramatic improvement in inventory turnover, as expected, which significantly reduced cash tied up in inventory.
The new company was operated at arm's length from the parent company, making it self-sufficient from a cash standpoint and requiring it to repay the parent company for acquisition costs. Despite these initial challenges and the need for repayment, the company was generating lots of cash on an ongoing basis within a year, thanks to these financial management measures.
Benchmark targets for Cash conversion cycle, Return on Invested Capital (ROIC), A/R days, A/P days, and Inventory turns were set to ensure continued improvement and maintain a strong foundation for positive cash flow. The Management team was educated on Cash flow management, ensuring a long-term understanding and proactive approach to cash management within the company.
Interestingly, due diligence revealed a number of investments and business improvements that needed to be made, but there was no indication of cash flow problems during this process or during the acquisition. This underscores the importance of thorough financial management and a proactive approach to cash flow, even in seemingly stable situations.
Supply Chain was uniquely positioned to manage cash flow due to its role in negotiating terms, managing inventory, and setting payment and inventory policies. This strategic positioning will continue to support the company's financial resurgence in the future.
In conclusion, the acquisition and subsequent financial management measures have not only rescued a cash-strapped company but also set it on a path towards sustained growth and financial success. The story serves as a testament to the power of effective financial management and the importance of a proactive approach to cash flow.
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