Published on: January 05, 2021
Financial management during times of uncertainty calls for a back-to-basics approach. Although it’s tempting to completely batten down the hatches (financially speaking) when recession looms, a more prudent course of action is to return to the basics of sound financial management.
The Four-Step Financial Management Approach
The following four-step approach to financial management will help your business build a sturdy foundation during this time of uncertainty. It will also serve you in good stead when times get better, too. Improving both financial and inventory management is a smart idea no matter what your business (or the world, for that matter) faces in the new year.
- Active Financial Planning
- Minimize Supply Chain Risk
- Simplify Product Segmentation and Related Inventory Management
- Reduce Fixed Costs
Each step alone can be an improvement, but taken together, they can create a solid financial footing for the new year.
Active Financial Management Planning
It may feel strange to think about large projects now, especially when the world seems so uncertain. New capital projects, updated marketing campaigns, adding equipment … all these projects take considerable funding. Should you consider it during tough financial times?
This is truly the ideal time to be proactive with your financial planning. Every project on the table should be reviewed in light of the budget requirements. Even if you must postpone such projects until the time comes when you have the revenue to support them, determining the activities to achieve the company’s KPIs is essential. Once you’ve assessed what it will take to achieve the objectives, you can budget for them accordingly.
Proactive financial planning includes several steps:
- Review the company’s overall strategic direction
- Develop and refine KPIs
- Assess the steps needed to achieve KPIs
- Identify the activities needed to complete the steps
- Compare bids and create budgets to begin the activities
Whether you’re doing zero-based budgeting or building on last year’s budget as a baseline, don’t neglect these steps for overall strategic planning and financial planning. Running a business without them is like trying to fly an airplane without a navigation system. You’ll get somewhere fast, but it may not be the desired destination.
Minimize Supply Chain Risk
If there’s one thing that many companies learned from this year’s business climate, it is that the supply chain has more links than we thought. Disruptions in one country impacted many countries, which in turn impacted others still further. The phrase “we’re all connected” was never quite as apparent as it was during the coronavirus crisis when shutdowns in a plant in one nation ended up disrupting a manufacturer half a world away.
There are several steps you can take to minimize supply chain risks to your company. These include:
- Revisit existing transfer policies: Existing warehouse and inventory management policies may prohibit or limit internal stock transfers. To prevent shortages, it may be necessary to revise such policies to allow for more latitude in stock transfers.
- Consider expanding your supplier list: Look beyond the obvious suppliers in your industry. Compare bids and quotes and include freight costs. Also look for suppliers in multiple countries or regions. For example, if one area of the world is impacted by a natural disaster, having a global supply network ensures there are other regions left undisturbed where you can obtain materials.
- Rebid items even among your best suppliers: Keep everyone on their toes by sending out a request for all suppliers to update their bids. Include all costs such as taxes, duties, import fees, and freight to accurately compare bids.
- Consider keeping more items in stock: Although inventory management best practices often suggest methods such as just in time delivery, when there’s a risk of significant supply chain disruption, having additional stock on hand is smart. Review the items your best customers purchase frequently and consider keeping them in stock rather than waiting to reorder when the amounts dip below a preset threshold.
These steps can reduce any potential negative impacts on your business from supply chain disruption.
Simplify Product Segmentation and Related Inventory Management
Several years ago, orange juice companies began offering multiple variations of their products in supermarkets. Original orange juice, pulp-free, low acid, added calcium, added vitamins … the list goes on. Customers reacted to the additional product segmentation negatively. “I just want orange juice!” frustrated consumers complained. They didn’t care if it had extra vitamins, low or no pulp. They just wanted orange juice.
The same may be said for manufacturers who segment their products to the point of creating two versions of the same item with such minute differences that they are virtually indistinguishable from each other. Product segmentation works as a marketing strategy but only if the products that are segmented align with customer demand. If the segmentation doesn’t add value to the product to a target audience, it’s a lot of effort for very little return.
Instead of constantly reinventing the wheel and offering multiple variations of the same product, simplify your segmentation strategies. Review the sales history of your products to find those that may have been over-segmented. Begin reducing those product lines that may be overly complicating something simple. If customers have told you in the past their version of “I just want orange juice!,” start with that product.
By reducing segmentation, you’ll also reduce related inventory management headaches and costs. Segmentation creates additional related SKUs and sometimes complicates inventory management. By reducing SKUs, you’ll have fewer variations to contend with in inventory.
Reduce Fixed Costs
Fixes costs, such as the cost of buildings, land, and equipment, often carry long-term leases, loans, and other financial obligations. This is a great time to review all fixed costs on the books and determine whether all are valuable or if you can divest the company of some of them.
Other ways to reduce fixed costs include reducing overhead. Perhaps warehouses can be combined, or smaller spaces leased. Equipment purchases may be delayed. These and other steps should be cost-conscious but realistic. It’s not smart to delay the purchase of new equipment if that new equipment is needed to fulfill current and future orders. You must weigh the pros and cons of reducing fixed costs against the possible benefits of investing in your business.
Improve Inventory Management
Another way to help your company’s financial position is to improve inventory management. Most businesses invest heavily in their inventory. Proper inventory management ensures this investment generates positive returns.
A few tips to help you improve your inventory management:
- Invest in systems such as barcode scanners and integrated warehouse and inventory management software. Such software automatically updates warehouse counts to the ERP or accounting system, ensuring a constant stream of up-to-date data that can help you do a better job of keeping stock levels steady.
- Review inventory reports frequently to spot discrepancies. Any differences between expected inventory and actual should be addressed quickly. It could be a simple miscount or mistake made during physical inventory or a sign of shrinkage.
- Enter items from receiving into the inventory quickly. The faster items can be moved into active inventory, the faster they can be sold.
- Process returns quickly, too. Make sure items are scanned back into inventory.
- Observe how items are picked and packed. Consider organizing changes in how the warehouse is organized if changing the layout saved picking and packing time.
- Update product codes and signage within the warehouse to ensure accuracy.
- Provide refresher training for all warehouse staff. Make sure everyone also has updated safety training, especially those driving forklifts and utilizing other equipment.
When so much money is sunk into inventory, improving inventory management can really pay off.
Updated Software Can Be a Cost-Effective Investment
Although managing finances includes reducing expenses, sometimes, spending money can actually be cost-effective. Spending money to update your business software, for example, can be cost-effective if it saves you time and provides information that helps you generate more business.
Warehouse management (WMS) and enterprise resource planning (ERP) software provides data that can be used to make improvements throughout your business. Cloud-based software offers the advantage of real-time updates, a plus for companies that run multiple locations and warehouses.
If you’ve been struggling to get the information you need to make better business decisions, now is the time to explore the many software options available. ERP, WMS, and others are available from Mindover Software. We’ll help you choose the best system for your company’s needs and work with you from selection to implementation and beyond. For more information, contact us or call 512-330-3994.