Managing Cash and Liquidity

In a turbulent environment, cash returns are important, if not more important, than reported profit returns. Cash returns lead to liquidity, and liquidity is a top priority consideration whenever risks and uncertainties surround a business situation, as they do in so many cases today. Cash and liquidity put any company in a better position to withstand a surprise blow, adapt to sudden changes, and capitalize on the narrower windows of opportunity that are commonplace in a turbulent environment.

This doesn’t mean that profits and profit growth are not important. The whole purpose of any business enterprise is to maximize profits and profit growth, but this objective will  not be achieved if business unit managers do not focus more time and attention on managing their cash and liquidity. Any entrepreneur that has lived through a start-up knows the importance of cash and liquidity. The entrepreneur knows from experience that a business can go bankrupt even while it is reporting profits. But it will never go bankrupt as long as its cash and liquidity positions are strong. Most corporate executives understand this point also, but many do not follow through to make sure it is sufficiently stressed or understood at the operating level. This is where the problem lies. Most business unit managers who operate under a corporate umbrella tend to overlook the importance of managing their own cash and liquidity and look instead to the corporation as a never ending source of funds.

The results are apparent in most corporations. Capital expenditure proposals tend to be a “wish list” often justified on project volume gains or cost savings that never occur. Working capital is allowed to build without adequate regard for carrying costs on the cash commitment. In short, overinvestment in plant and equipment, and working capital often serves as a buffer to cover sloppy business practices and control. These are practices that inevitably lead to an investment base that is too big for the business and to marginal profit returns.

Many operating managers in a corporation are not even aware of the costs incurred while excess capital is tied up in the business. This is not an exaggeration. Just ask any four or five business unit managers how much it costs to carry their inventory. Most of them will acknowledge an interest cost of, say 7—8 percent, but few will recognize that total carrying costs, which include storage, taxes, obsolescence, and shrink, actually run closer to 30 percent in today’s environment. We would also bet that none of them have such charges against their earnings, even though it is a very legitimate cost of doing business.

Not every company operates this way. Most corporate executives are not tough minded or rigorous enough in challenging cash commitments, and most business unit managers have more cash tied up in their business than required.

Ideally, every manager should think like a small business entrepreneur with his or her own money at risk. If this were the case, we would not see so many companies with bloated balance sheets and marginal returns. Left on their own, most business unit managers do not think this way, however. Life is not easier when you can draw almost at will on coroprate resources to meet the payroll, build inventories, and buy supplies, tooling and a lot of equipment. Under such conditions you don’t have to worry very much about how to make ends meet.

My Consultancy–Asif J. Mir - Management Consultant–transforms organizations where people have the freedom to be creative, a place that brings out the best in everybody–an open, fair place where people have a sense that what they do matters. For details please visit www.asifjmir.com, Line of Sight

Potential Problem Analysis

This process is based on our concern with future events—with what might be and what could happen. We call it Potential Problem Analysis. A potential problem exists when we can foresee possible trouble in a given situation. No one knows for sure that trouble will develop, but no one can guarantee that it will not. This process uses what we know or can safely assume in order to avoid possible negative consequences in the future. It is based on the idea that thinking and acting beforehand to prevent a problem is more efficient than solving a problem that has been allowed to develop. This rational process enables an organization to take an active hand in shaping its future.

My Consultancy–Asif J. Mir - Management Consultant–transforms organizations where people have the freedom to be creative, a place that brings out the best in everybody–an open, fair place where people have a sense that what they do matters. For details please visit www.asifjmir.com, Line of Sight

Commitment to Self Knowledge and Development

This value is a commitment to one’s own personal growth and understanding. On a personal level, people with this value are introspective, principle driven, and constantly learning about themselves. Managers translate this learning into leadership that inspires both personal and professional development in employees.

Organizations dedicated to self-knowledge are learning institutions. Their value of people as appreciating assets, not costly liabilities, overshadows all other decisions. Through a board, caring human capital investment strategy, executives make large investments in training; managers cultivate employee effectiveness and their successors; and employees learn to innovate and take risks. For these companies, managing learning is a full-time job, and for their companies to grow each year, every employee must grow and develop.

My Consultancy–Asif J. Mir - Management Consultant–transforms organizations where people have the freedom to be creative, a place that brings out the best in everybody–an open, fair place where people have a sense that what they do matters. For details please visit www.asifjmir.com, Line of Sight

Overspending on Capabilities

Given that competence and endowments are so important, why do firms not outbid each other in the process of acquiring a capability so that whoever ends up with it has paid so much for it that it is no longer profitable? In some cases firms have actually paid too much for capabilities. Some failed acquisitions can be placed in this category. For two reasons, however, winners can still end up with profitable capabilities. First, because firms may not even know explicitly if there is competition going on or what capability it is that they are competing for, there may not be enough competitors to overbid them for the capability. For example, not all firms knew that IBM was looking for an operating system to buy for its personal computers and therefore did not have a chance to compete for the standard. Second, not all firms have the right complementary endowments that are sometimes critical to build a capability. Not all firms have a Bill Gates whose shrewdness and experience helped make DOS a standard.

My Consultancy–Asif J. Mir - Management Consultant–transforms organizations where people have the freedom to be creative, a place that brings out the best in everybody–an open, fair place where people have a sense that what they do matters. For details please visit www.asifjmir.com, Line of Sight

Direct and Indirect Costs

In manufacturing, “direct costs” refer to costs that are readily traceable to products—for example, direct material and direct labor. The term is also used to identify costs that are traced as incurred to specific functions, to distinguish them from allocated or transferred costs. In distribution the classification of costs as direct or indirect depends on the segment. The more general the segment (sales division in sales territory), the greater the portion of costs directly traceable to it, the more specific the segment (products, customers), the greater the proportion of indirect costs. Direct costs are those costs that can be traced to a business segment. If that segment were eliminated, the costs no longer would be incurred.

Indirect costs, costs such as general administrative expenses, are often allocated  to segments, but this process is arbitrary at best and should be avoided.

My Consultancy–Asif J. Mir - Management Consultant–transforms organizations where people have the freedom to be creative, a place that brings out the best in everybody–an open, fair place where people have a sense that what they do matters. For details please visit www.asifjmir.com, Line of Sight

Understand the Objective of Forecasting

The objective of every forecast is to support decsions that are based on the forecast, so an important first step is to clearly identify these decisions. Examples of such decisions include how much of a particular product to make, how much to inventory, and how much to order. All parties affected by a supply chain decision should be aware of the link between the decision and the forecast. Failure to make these decisions jointly may result to either too much or too little product in various stages of the supply chain.

My Consultancy–Asif J. Mir - Management Consultant–transforms organizations where people have the freedom to be creative, a place that brings out the best in everybody–an open, fair place where people have a sense that what they do matters. For details please visit www.asifjmir.com, Line of Sight

Failure Mode and Effect Analysis (FMEA)

“It is always better to be prepared and prevent rather than to repair and repent.” This is a quotation which emphasizes preventive techniques.

World is ever changing. People went better from good and best from better. Industry people have also begun to think of different approaches to satisfy the customer. They have now come to the stage of finding out the methods to prevent a problem rather than ‘finding out a solution to a problem’ and finding out methods to eliminate waste from monitoring of waste.

Failure mode and effect analysis is one of the tools of total quality management which helps in finding out the possible failure modes of a design, product, process or service and setting up ways to prevent their occurrence.

FMEA is a proactive tool which is used to foresee the probable failures that can occur at a later stage. This forces one to analyze critically each and every process with the sole aim of identifying problems that may emerge.

• A failure mode and effect analysis is an engineering technique used to define, identify and eliminate known and/or potential failures, problems, errors and so on from the system, design, process and/or service before they reach the customer.
• The FMEA will identify corrective actions required to prevent failures from reaching the customer, thereby assuring the highest durability, quality and reliability possible in a product or service.

FMEA involves:

• Identifying known and potential failure mode;
• Identifying cause and effect of each failure mode;
• Prioritizing the failure mode according to Risk Priority Number;
• Finding out preventive action for failure mode.

My Consultancy–Asif J. Mir - Management Consultant–transforms organizations where people have the freedom to be creative, a place that brings out the best in everybody–an open, fair place where people have a sense that what they do matters. For details please visit www.asifjmir.com, Line of Sight

Dependence on the Market

Firms with a high dependency on a market in which a competitive action is taken are more likely to respond to that action. For example, firms with a large amount of their total sales from one industry are more likely to respond to a particular competitive action taken in that industry than is a firm with businesses in a multiple industries (e.g., a conglomerate). Thus, if the type of action taken has a major effect on them, firms are likely to respond, regardless of whether the action is strategic or tactical.

My Consultancy–Asif J. Mir - Management Consultant–transforms organizations where people have the freedom to be creative, a place that brings out the best in everybody–an open, fair place where people have a sense that what they do matters. For details please visit www.asifjmir.com, Line of Sight

Challenges of Execution

A successful change effort requires: a) adequate appreciation and planning, b) sufficient support by employees, c) competent execution by managers, and d) change managers with appropriate skill sets and capabilities. Less than one-third of all organizational change efforts are successful in producing anticipated results. There are eight reasons for this low success rate. Organizations that fail to produce results after undertaking change do so because managers in these organizations do not:

1. establish a sense of urgency among employees;
2. form a powerful guiding coalition for implementing change;
3. create a powerful vision to energize employees;
4. communicate their vision effectively to employees;
5. empower employees to act on their vision;
6. plan for and create short-term wins;
7. consolidate improvements and produce still more change; and
8. institutionalize new approaches.

The first four reasons deal with appreciating change and mobilizing support and the last reason relates to creating capability for change. Remaining three reasons concern the implementation of change. There are three prerequisites to effective execution of change, relating to empowerment, motivation, and consolidation.

My Consultancy–Asif J. Mir - Management Consultant–transforms organizations where people have the freedom to be creative, a place that brings out the best in everybody–an open, fair place where people have a sense that what they do matters. For details please visit www.asifjmir.com, Line of Sight

Monopolistic Competition

It is assumed that—as in pure competition—firms do not collude on price or quality, and also that free entry into the industry (or exit from it) is possible. The monopolistic element in monopolistic competition is product differentiation: each firm has its own unique variety of product. This gives the firm some monopoly power, since each enterprise will have a “clientele” of customers closest to it on the ring of preference. In a particular city, for example, there may be a dozen supermarkets. They may be closely competing in some respects, but each has some monopoly power due to geographical location on other special features that make it the favorite of a fraction of the customers. We see that a group of monopolistically competitive firms produce more and charge less than would a monopolistic operating several plants.

 Each independent firm would produce more output than a monopolistic  would allow its point to produce. The reason is that the independent firm’s perceived demand curve is more elastic (flatter) than the monopolist’s per-plant demand curve.

 My Consultancy–Asif J. Mir - Management Consultant–transforms organizations where people have the freedom to be creative, a place that brings out the best in everybody–an open, fair place where people have a sense that what they do matters. For details please visit www.asifjmir.com, Line of Sight