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Asset reduction programs: Chopping versus pruning

Publication date: 
September 2010
Author: 
Dr. Albert D. Bates, Profit Planning Group

"So this EASA member walks into a bank and asks for a loan."  Well, there's no need to wait for the punch line as it is no laughing matter. In many cases, the credit available to members has all but dried up. Where money is available, banking requirements are becoming more restrictive almost every day. The likelihood of things getting better any time soon is remote.

With enough patience and concerted effort, the cash challenge associated with disappearing lines of credit can be overcome by rethinking gross margin and expense levels even during a recession. In fact, this will be the topic of the next Profit Improvement Report.  However, many distributors need cash now, not in six months. The conclusion is that inventory and accounts receivable reductions are in order.

The reality is that most of the actions typically taken to lower investment levels are cash positive in the short run and dangerously profit negative in the long run. Given the multiple effects of cash generation programs, EASA members need to take a step back and rethink their investment levels in some different ways.

This report will examine two very different approaches to reducing the investment levels in accounts receivable and inventory:

  • Chopping - An immediate reduction in investment levels to generate cash as quickly as possible.
  • Pruning - A more gradual approach to investment reductions, but one that does not create long-term profit problems.