Knowledge Base - Cash Flow

Taking a Critical Look at Receivables & Inventory

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