Are “Idle Assets” Holding Your Company Back?
Many manufacturing, trades and technology companies are facing cash flow challenges due to “idle assets”. We all know that “Cash is King.” Without positive cash flow even a profitable company can find itself in peril due to liquidity issues. Idle assets in the company tie up cash but do little to generate cash flow or profits.
Examples of Idle Assets
Many companies will invest significant amounts of money in machinery and other capital assets. But they fail to analyze the return on investment or additional cash flow the item will generate.
There are many cases where the business uses the capital item sparingly. For example, a machine may have cost $50K to produce products that the company does not regularly produce. The annual gross profit of the product that the machine produces is only $10K per year. This means the company has tied up $50K to generate an additional $10K per in additional cash flow.
Some might argue that this represents a 20% return on investment. Others will argue that a 5 year pay back is too long. Either way a company must assess it’s cash flow capabilities. This helps ensure the company can handle tying up money on an asset that is producing low cash flow. It is sometimes better to outsource production at a lower gross profit than to tie up large amounts of cash on capital items until the volumes warrant it.
Stale or Excessive Inventory
Many manufacturing, trades and technology companies find themselves short of available cash. Often the reason is they are tying up too many resources in inventory. Changing Markets often affect the quantity and mix of products being sold. But the company doesn’t make the appropriate adjustments. This results in an over abundance of items in stock. Excessive inventory can be idle assets that may have sold well months ago but are substantially less now.
Many companies will also buy inventory in large volumes to take advantage of price breaks. This is a great strategy if the company has the cash flow to handle it. However, the reality is that the inventory sits on the shelf much longer than anticipated. This puts pressure on cash flow.
Expense items such as insurance are often set to pay annually in advance. Your accountant will amortize insurance on a monthly basis so it properly reflects the monthly profitability. But that doesn’t account for the fact that you may have taken $10K, $20K or more out or your cash flow to cover the expense. Depending on your current cash flow it may be prudent to pay a little more to pay in monthly installments vs. a lump sum.
It is imperative that companies preserve their cash flow. Only make large payments when absolutely necessary or if your current and future cash flow can truly afford it.
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