Growing Receivables and Inventory Use Cash.

Cash shortages can be brought on by numerous factors. Some involve receivables and others relate to inventory. 

If a company is facing a tight cash situation, one or more of the following factors could be the problem. Identifying the causes is the first step to finding a solution

Why do receivables and inventory use up cash?

• Receivables – You have purchased the material, paid employees and shipped the product, but have not been paid yet.
• Inventory – You have purchased the material and paid employees, but the product is sitting in your plant.  

Reasons Behind Increasing Accounts Receivable

• Sales are up
• Customer payments are slowing down
• Customers are not paying invoices in full (retainers)
• Disputed invoices (Minor disputes can hold up payment of entire invoice)
• Unrecognized bad debts
• Follow-up procedures are not being followed, perhaps due to change in personnel
• A new customer is slow in paying
• Delay in getting invoices out (e.g.: invoice dated on the 1st but not mailed until the 15th)
• Customer believes goods were purchased on consignment and doesn’t want to pay until goods are sold
• Company holding open sales at end of month to meet revenue projections
• Someone is diverting cash receipts

 Reasons Behind Increasing Inventories

• More inventory needed to support growing revenues
• Revenues dropping and adjustments not made to change purchasing patterns
• Buying the wrong stuff
• Customer buying patterns are changing
• Scrap not being recognized and expensed
• Obsolete inventory not identified and written off (expensed)
• Cost accounting system not properly relieving all of the costs associated with a sale
• Inventory used for internal purposes but not recorded
• Inventory that has been stolen needs to be replaced but has not been removed from the books
• Damaged inventory not recognized and written off
• Stocking up for additional location
• Customers requiring company to maintain their safety stock (Just-in-time or kanban)
• Trying to be all things to all people
• Abnormal amount of customer returns
• Loss of a customer without close-out of inventory related to that customer
• Company introducing new product line requiring inventory build-up
• Significant increase in cost of raw component
• Company continuing to produce to keep from laying off employees
• Employees producing to meet incentive plans instead of what’s needed
• Company acquired another company along with its inventory