Things can get so mixed up!

                                INVENTORY MANAGEMENT AND THE CREDIT LINE

A friend of mine—we’ll call him Walter—owns a fairly large business. We were talking the other day and he said, “Dan, my business is growing so I went to the bank to increase my line of credit. I need the additional credit line as our sales volume is increasing. The bank turned me down. Go figure.” We talk a bit more as we walk around the warehouse when I spot a number of heating units back in the corner.

I said, “Walter, you know that large batch of heating units you bought in December of last year?” (He was so proud of the end-of-the-year deal he made with his heating unit supplier that he had to call me and fill me in.) “I don’t think you’ve paid for them so they are still consuming your line of credit.”

Walter answered, “Sure I did. We pay on our line of credit every month.”

“Sure you do, but you’re paying only the top half of your line,” I responded. “These units are in the bottom half of the line. Your line of credit is relative to the product that consumed it.” I continue, “Let’s split your $500K line of credit in half; the bottom $250K and the top $250K. Now let’s value and age your inventory.”

On doing so, we found the inventory that has been in the warehouse for over 12 months—for example the heating units—consumes close to the full bottom half of his line of credit. Walter had been working only the top half of his line of credit, which is far shy of what he needs to run the business successfully.

The same holds true for all of us. When we spend a dollar, we need to offset that dollar with a relative income dollar. Better yet, we really want to offset the expense dollar with a relative income dollar and fifty cents or better.

After our little discovery, Walter said to me, “Man, I need to get those heaters and that other non-essential product out of here, all the product that’s in that bottom half.”

I nodded in agreement. “You sure do.” Then I added, “By the way, Walter, that will also cure your need for additional warehouse space.”

He replied, “How so?”

I smiled at him and said, “I’m hungry, let’s go get lunch.”

_________________________________________________________________________________________________

Dan Belanger is president of the Belanger Technology and Consulting Group. His background includes thirty years of solution-based action in multiple business models including distribution, manufacturing, warehousing, facilities management, service, retail, and information systems. He is well-versed in all aspects of business ownership, operations, and management.

With time spent at the executive management level in field implementations and having worked closely with business owners, executives, and staff, he understands the complexities and expectations related to running a profitable business. Dan understands the human element, which makes managing comfortable and successful change one of his core competencies.

 

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