This study shows how applying simple but effective cost leadership can have a significant impact on profitability and cash flow.
My mother says, “look after the pennies and the pounds will look after themselves”. She doesn’t have a business qualification and she has never attended a costly negotiating skills course, but she understands cost and waste very well.
We often hear how strong negotiators have driven another 1% out of customers or suppliers to improve profitability on a single project. Sales, procurement and project managers often improve on budget using their superior negotiation skills, yet the company still misses its year end profitability due to poor execution, and to compound matters they suffer serious cash flow difficulties.
Many companies still waste more than any sales team could recover through effective negotiations. But there are companies out there making a positive impact on year end profitability through proven operational effectiveness and simple cost leadership methods based on common sense.
Those who have viewed the case studies on our website will know we showcase the positive impact well managed “factors of production” (Land. Labour, Capital and Enterprise) can have on business capacity and profitability. But, some “money pits” can be less visible to leaders whose primary focus is on strategic rather than tactical and operational aspects of the business.
Often it is best to ask those who work in the facility on a daily basis, even offering incentives for cost saving and cash flow protection ideas. Examples I have seen include: -
- Exchanging plastic pallets for recycled wooden euro pallets at a tenth of the cost.
- Systematically upgrading lighting to LED to provide clinical lighting conditions at lower cost.
- Segregation of metal waste into separate skips doubling revenue from scrap.
- Moving the scrap collection date from weekends to normal working hours saving 25%
- Changing cutting fluids to increase machining speeds and feeds without impacting quality.
- Value engineering – establishing economies of scope and scale across similar products.
- Negotiating factory rate relief through annual “change of use” assessments.
- Encouraging suppliers to hold stock to reduce the burden of excess inventory.
- Eliminating hardening processes by using “through hardened” materials (time & cost)
- Back charging suppliers for re-work carried out on their behalf (time & cost)
- Negotiating positive cash flow payment terms on customer and supplier contracts.
Reversing the money pit – Companies often need external funding to initiate and execute a growth strategy that promises a healthy return on investment, and this can make perfect sense. There are many companies however, that need additional funds because their cash flow has been compromised, this may be due to late customer payments or unforeseen circumstances. Whatever the reason, it must be easier (and cheaper) to obtain external funding when demonstrating effective cash management. It could also eliminate the need for additional cash in the first place.
At kadops we have direct experience of leading UK SME’s into positive cash flow positions, so much so, that they went on to fund further investment within their international group. As stated, most of these ideas are common sense and are generated from within, but if you do need help getting things started, please feel free to contact me.