Companies need cash to grow and improve profits. Often that cash lies right there within the business, and by optimising working capital and keeping cash flow flowing, companies can tap into those reserves.
“The money companies need to grow, and sadly for some, the funds to continue operating, is often sitting on the warehouse floor,” says Paul Marketos, MD of Bluekey Software Solutions, which is a local technology company that specialises in the implementation of SAP Business One.
He says that when money is tied up in inventory, specifically excess and slow-moving inventory, it can’t be used in other areas of the business which would bring quick returns such as for servicing debt; buying good stock (ie. items that sell well), investing in growth, claiming settlement on discount purchases, and earning interest. Instead, this money sits idle, earning no interest and depriving the business of vital working capital – or cash – to fuel growth.
This, says Marketos, is a common problem for many stock-based businesses. So, it would seem then that better stock management can help free-up working capital. But this is easier said than done.
“Because there are so many factors influencing demand, it’s tough to predict. Buyers sometimes have to rely on gut feel when forecasting demand and the stock they’ll need to meet it. Rather than risk not being able to meet demand, they adopt a ‘just to be safe’ approach which often leads to over-purchasing and excess stock sitting in the warehouse. A side effect of this is that more working capital than necessary is tied up in stock. This affects cash flow.”
Marketos says enterprise resource planning (ERP) systems can take the guesswork out of forecasting demand and improve stock management. “Sophisticated ERP solutions like SAP Business One offer companies the ability to better manage their stock by using scientific formulae to predict demand based on historical sales. These algorithms, refined over years of statistical analysis, will inevitably be more accurate than a buyer’s gut feel.
“Companies can typically see a reduction of at least 20% of stock holding in the first six months of implementing ERP. Furthermore, as companies are right-stocked with products that move, stock days also fall quite dramatically. We’ve seen stock days, or the length of time that a product sits on the warehouse floor, drop from over 150 to 45 days,” he says.
A customisable ERP solution like SAP Business One can automate most of the processes that many smaller sized businesses still do manually. For instance, when stock runs low, the procurement manager will automatically be notified so that the stock can be updated. Then, once a purchase order has been generated, sales personnel are able to see which stock items are on order and are available to promise. Picking, packing, delivery and invoicing can also be further automated, reducing the time from order to delivery, and improving service levels and accuracy.
“Optimised working capital is a guaranteed consequence of right-stocking, improved stock management and streamlined administrative processes. By managing credit risk better, and chasing debtors in a more informed and timely manner, debtors days can also be brought down significantly. For example, it is easy to set up a system like SAP Business One to send through a sales order for approval if the customer is in arrears for more than 60 days, or prevent new customers from being added unless proper credit vetting has taken place.
“By centralising information and allowing for real-time reporting, companies are also able to manage by exception and reduce costs through being alerted more readily about possible problems.
“Simply put, with proper, automated processes in place, things just run more efficiently and cash, the lifeblood of a business, keeps flowing,” says Marketos, adding that a company which Bluekey recently implemented the solution for has reduced its stock holding by 35% and freed-up R14-million in working capital.
He concludes saying that SAP Business One, which is designed with the small to medium size business in mind and is highly-customisable, brings the power of ERP within reach, enabling companies to operate optimally, reduce costs and be more competitive.
“Companies that believe they don’t have the money to invest in a good ERP system should look to the warehouse floor. The money is sitting there just waiting to be freed-up.”