Introduction:
Maintaining a healthy cash flow is crucial for small businesses to thrive and invest in growth This case study showcases how a small business with $3.5 million in annual sales strategically tripled its cash balance from $229,000 to $700,000. Success hinged on a collaborative approach, using Lean and Six Sigma methodologies from Proval alongside expert cash flow consulting.
Client Background:
The client, a small business, faced difficulties accumulating surplus cash for expansion despite steady sales and profits. Their challenges included:
- Limited excess cash: Profits were insufficient for strategic investments.
- High working capital: Accounts receivable and inventory tied up substantial funds, impacting liquidity.
- Inefficient operations: Suboptimal profit margins due to operational inefficiencies.
- Early payments: Ineffective accounts payable management led to unnecessary cash outflows.
Objectives:
The primary objective was to triple the cash balance to $700,000 within a year, enabling investment in future growth. Proval and the cash flow consultant aimed to achieve this by:
- Increasing net income: Optimizing operational efficiency and profit margins.
- Optimizing working capital: Improving accounts receivable, inventory, and accounts payable management.
Problems Identified:
- Insufficient profit generation hampered cash accumulation.
- High working capital due to outstanding receivables and excessive inventory.
- Operational inefficiencies eroded profit margins.
- Ineffective accounts payable practices led to early payments, reducing cash flow.
Solutions Proposed:
Net Income Improvement:
- Proval implemented Lean and Six Sigma: Streamlined operations and eliminated waste, aiming for a 5% cost reduction and optimized profit margins.
- Cash flow consultant negotiated supplier cost reductions: Targeting a 2% increase in gross profit margin.
Working Capital Optimization:
- Cash flow consultant enhanced accounts receivable management: Proactive collection efforts aimed to reduce the average payment period by 10 days.
- Proval implemented Lean inventory management: Optimized stock levels and reduced inventory days by 15%.
- Jointly negotiated better payment terms with suppliers: Aiming for a 25-day average payment period.
Implementation:
Proval and the cash flow consultant worked closely to execute the plan:
- Lean and Six Sigma methodologies were applied to streamline operations and identify cost-saving opportunities.
- Supplier negotiations secured lower costs and optimized payment terms.
- Improved accounts receivable management practices accelerated collections.
- Lean inventory management techniques reduced stock levels and optimized cash flow.
Results:
- Net income increased by $125,000: Lean and Six Sigma expertise combined with strategic cost reductions boosted profitability.exclamation
- Working capital optimization generated $248,000 in cash: Improved receivables, inventory, and payables management freed up significant funds.
- Cash balance reached $555,000 by 2022: Surpassing the initial target and paving the way for future growth.
Conclusion:
This case study highlights the effectiveness of combining diverse expertise:
- Lean and Six Sigma principles: Enhanced operational efficiency and profitability.
- Cash flow management strategies: Improved working capital and liquidity.
- Collaborative approach: Proval’s expertise complemented the cash flow consultant’s guidance.
The resulting cash flow improvement empowered the business to invest in growth and seize future opportunities. This case underscores the power of combining specialized knowledge and collaborative problem-solving for sustainable financial success.
Project Details
- Category: Cashflow Consulting
- Client: Small Business
- Location: U.S.A
- Duration: 3 months
- Results: Cash balance reached $555,000 by 2022