The six "don'ts" of working-capital management are:
1. Don't manage to the income statement.
Many important cost items don't appear on the income statement, which often encourages managers to tie capital up in stock and receivables. Example: one metals refining firm reduced its level of receivables from 185 days to 45 days. This caused a fall in sales but allowed the company to save $8 million a year in reduced capital costs, which more than compensated for the lower operating profit.
2. Don't reward the sales force for growth alone.
When salespeople are rewarded only for booked sales, they have no incentive to help you manage customer payments. Example: at the same metals refining firm, the sales staff was directed to help manage receivables. The percentage of overdue or bad receivables fell from 12% to less than 0.5% of the total, generating annual cash flow of nearly $3 million.
3. Don't overemphasize production quality.
Rewarding production people primarily on quality metrics encourages them to gold-plate and slow down production. Example: one European producer of drive systems for power generation had a manufacturing cycle nearly three times longer than those of its competitors, but the company was unable to pass associated costs along to customers. By scaling back on non-value-added quality, the firm reduced cycle times and cut inventory by 20 days, freeing up €20 million in capital.
...........(4,5,6nya besok lagi yah. Sabar!)
1. Don't manage to the income statement.
Many important cost items don't appear on the income statement, which often encourages managers to tie capital up in stock and receivables. Example: one metals refining firm reduced its level of receivables from 185 days to 45 days. This caused a fall in sales but allowed the company to save $8 million a year in reduced capital costs, which more than compensated for the lower operating profit.
2. Don't reward the sales force for growth alone.
When salespeople are rewarded only for booked sales, they have no incentive to help you manage customer payments. Example: at the same metals refining firm, the sales staff was directed to help manage receivables. The percentage of overdue or bad receivables fell from 12% to less than 0.5% of the total, generating annual cash flow of nearly $3 million.
3. Don't overemphasize production quality.
Rewarding production people primarily on quality metrics encourages them to gold-plate and slow down production. Example: one European producer of drive systems for power generation had a manufacturing cycle nearly three times longer than those of its competitors, but the company was unable to pass associated costs along to customers. By scaling back on non-value-added quality, the firm reduced cycle times and cut inventory by 20 days, freeing up €20 million in capital.
...........(4,5,6nya besok lagi yah. Sabar!)
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