Choose: It’s Either Inventory, Receivables or Cash

I frequently tell my students to look at a balance sheet of a retailer and tell me which categories are the biggest assets. Hint: It’s not in cash. The biggest assets are probably inventory and possibly receivables. These categories will eventually be converted to cash- but how long will that take? The faster we get to cash, the better. Why? Because the faster we can more these assets to cash, the less total cash we need to run the business.
Dell has had a great model for cash flow. Until now, they haven’t had a retail distribution network. Dell sells direct to customers through its website. They don’t build the computer until you specify what you want and buy it. As a result, they have virtually no inventory. No inventory, no cash invested in inventory. Since buyers pay with credit cards, they collect their cash fast- they’re paid by the credit card company in a matter of days. What a great model! In fact, this model has allowed Dell to price their PC’s below their competitors.
Customer habits have changed. “Consumers- the growth engines of the U.S. PC market- have started gravitating to store to buy portable notebook computers." Dell has reached an agreement with Wal-Mart to sell PCs through their retail stores. That means Dell ships inventory to Wal-Mart, incurs inventory costs and uses more cash. They also have lower profit margins- profits are eroded by shipping, inventory and other costs.
The Lesson: Business owners need to take a hard look at the cash they have tied up in inventory and receivables. Can either category be reduced without hurting sales?
Your Homework: Review your inventory listing for items that aren’t selling. Are they obsolete? Can prices be reduced to clear out this inventory?
(Source: “Dell to Rely Less on Direct Sale”, Wall Street Journal, 5/25/07)