Wednesday, February 2, 2011

Cash and Its Equivalents

As I walk around the company, I love those moments that turn into teaching opportunities. Sometimes it's an opportunity to explain how something works. Sometimes it's why we have a certain procedure or policy. Sometimes I get to employ an object lesson--one that utilizes an object to make a point.

During a discussion about product costs, the president of the company asked me how much a certain part cost. "If it's the first one of the work order, it costs a lot. If it's the last one, there's hardly any dollars in it at all," I responded. I then explained how our inventory and Work-in-Process (WIP) system tracks material and labor costs by work order. The WIP dollars are "issued" to inventory at the time the finished parts go into inventory. If the parts are received into inventory at the same time for a particular work order, then the dollars are applied to inventory at different rates. Also if the first parts ship before the last parts get into stock, then the cost applied to the sales order will be inflated. By looking at the parts, and tracking where the complementary parts were, we had a more enlightening discussion about product costs and the system policies.

Similarly, I have used product that's currently in WIP to explain that not only do the parts represent "potential revenue", but so does the schedule of unstarted orders. We have already invested time and materials to those orders. At that time, they are orders with a "cash flow" loss. The faster we can get the orders completed and shipped, the better our cash flow. Many are often surprised when we look at some parts, and the data, indicating that our contact time with the parts is very low.  In this particular company, we only had labor or machine contact with the parts 11 percent of the time, on average. "But I worked on those parts all day," sometimes I would be told. "That just means those parts sat idle (and alone) for several days before or after you worked on them," I would say. We would then look up the information on the computer with regard to when they were touched by the various departments.

With that information, and understanding how it looked in real life, we were able to make some changes that improved our costing system and our cash flow. Parts and scheduled orders may not be cash but they are "cash equivalents" from a business wealth perspective. The faster things move and get processed, the healthier the business will be.

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