What To Do With The Coffee Grounds
In this issue:
After the Profit What To Do With Left Overs
310 words, a 2 minute read.
We have been talking about all the levers in the business to drive better performance. Achieving the 20% net operating profit level is akin to drinking a very well-prepared cup of coffee. But what happens to the coffee grounds?
Coffee grounds being what’s left over (used in the process) while all work is done and profit is earned. This brings in the idea of working capital. How much cash, AR, Inventory & payables and even fixed asset investment does the business need to carry-on?
One reality is: CI businesses are not capital intense. And in situations where client deposits precede deliveries and work being performed, you might say it is nearly capital neutral.
It is not unusual to find companies that have 45 days of revenue in client deposits. A $4M company may have $500M or more in client pre-paid monies.
So how much working capital could be deployed? Hence, our reference to coffee grounds.
AR may be as few as 15 days and inventory (30 days of COGS or just 12 days of revenue). Our payables to vendors could be 5 days of revenue and our money left in fixed assets is rarely more than 10% of revenue or 36 days of cash tied up. Together these would be 58 days of cash tied up in working capital. For this $4M company that could be $635,000.
Why is this important? Well, the more grounds you have the less coffee (profit and free cash it yields). Tight controls over AR, Inventory, AP and fixed asset investment are just plain good management.
Having specific people who own each of these areas and having a discrete process for managing the levels is fundamental to good working capital management.
We hope you will keep your coffee grounds under control.