““Cash, though, is to a business as oxygen is to an individual: never thought about when it is present, the only thing in mind when it is absent.” ”
3 levers: Inventory, receivables, and payables.
Focus on learning how to manage them, copy from the best, and never get complacent. These 3 lines on the balance sheet are where cash is hidden.
Purchasing the correct inventory is the hardest and most important process of any product-selling business. It is a process that should be continually improved. We use software to analyze GMROI (Gross Margin Return on Investment) and create an initial order sheet. Our team then analyzes to ensure there were no extraordinary sales or lost customers which could be inflating the order. They also include new items and special orders for larger clients which would not be factored in by the software.
Improvement of receivables is a positive flywheel. Better collection and credit procedure leads to more credit which leads to more sales capacity. I have found in the US the collections process to be reliable. Our OpCos in Latin America are a different animal.
Improvement of payables is a one-time benefit. Lengthen out terms on payments and get a quick boost to cash on the balance sheet. If the business continues to grow, these new terms will continue to increase available cash.
With short-term treasuries paying 5%, cash on the balance sheet is a productive asset. Besides also being the oxygen your business needs to live:
“Cash, though, is to a business as oxygen is to an individual: never thought about when it is present, the only thing in mind when it is absent.” – Warren Buffett