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How reducing the logistics cycle by one day affects working capital
The speed of money turnover in the logistics business does not always depend on the work of machines and warehouses. Often, time affects the freezing of finances. This is when you have spent money on goods but have not yet received it back from the customer. Every extra day between purchase and payment is a period when your money is not working for you. LLC «FabriQuanta» experts emphasise that if you reduce the logistics cycle by one day, part of these funds will be returned to you faster, and you will be able to use them to solve new business tasks.
Where money is tied up in logistics
The logistics cycle is the period of time that begins with the purchase or production of goods and ends with the receipt of money from their sale to the end consumer. The path of goods looks like this: purchased/produced – placed in storage – sold – payment received. Until the money comes in from the customer, your funds are frozen. The money you have invested is working capital that is constantly tied up in goods, inventory and customer debts. The longer the cycle lasts, the longer your funds are not working.
Warehouses are often perceived as an asset. In reality, they are a place where your money is tied up in the form of goods. If your inventory is calculated for 30 days of sales, it means that you have pre-financed an entire month. If you reduce the cycle by one day, you free up the value of one day of sales. A single day may seem insignificant, until you calculate its value for the entire year.
The logistics cycle is the period of time that begins with the purchase or production of goods and ends with the receipt of money from their sale to the end consumer. The path of goods looks like this: purchased/produced – placed in storage – sold – payment received. Until the money comes in from the customer, your funds are frozen. The money you have invested is working capital that is constantly tied up in goods, inventory and customer debts. The longer the cycle lasts, the longer your funds are not working.
Warehouses are often perceived as an asset. In reality, they are a place where your money is tied up in the form of goods. If your inventory is calculated for 30 days of sales, it means that you have pre-financed an entire month. If you reduce the cycle by one day, you free up the value of one day of sales. A single day may seem insignificant, until you calculate its value for the entire year.
One day faster = more money
Imagine that you sell 100 units of goods per day. The logistics cycle is 20 days. This means that 2,000 units are involved in the process at the same time. Your money is tied up in them. If you reduce the cycle to 19 days, there will be 1,900 units in the process. The difference is 100 units, which is a whole day's sales. This money is no longer tied up in goods - it is returned to you and can be used again.
If this is not taken into account, it turns out that the company keeps part of the money in goods in the warehouse all the time. It also pays for storage, insurance, and sometimes interest on loans if these stocks are financed with borrowed money.
The faster goods are delivered, the less stock you need to keep ‘just in case.’ If you have a lot of goods in stock, this is a risk: the goods may become obsolete or spoil. When the cycle is shortened, you can keep a smaller reserve in case of delays.
Imagine that you sell 100 units of goods per day. The logistics cycle is 20 days. This means that 2,000 units are involved in the process at the same time. Your money is tied up in them. If you reduce the cycle to 19 days, there will be 1,900 units in the process. The difference is 100 units, which is a whole day's sales. This money is no longer tied up in goods - it is returned to you and can be used again.
If this is not taken into account, it turns out that the company keeps part of the money in goods in the warehouse all the time. It also pays for storage, insurance, and sometimes interest on loans if these stocks are financed with borrowed money.
The faster goods are delivered, the less stock you need to keep ‘just in case.’ If you have a lot of goods in stock, this is a risk: the goods may become obsolete or spoil. When the cycle is shortened, you can keep a smaller reserve in case of delays.
How to grow your business without loans
Many believe that growth always requires additional investment. But often, it is enough to shorten the logistics cycle, according to LLC «FabriQuanta». With a shorter cycle, the same working capital can serve a larger volume of goods. In other words, a business can grow simply by ‘turning over’ the same funds more quickly.
It is important to understand that acceleration is not always free. Fast delivery can be more expensive, batches can become smaller, and shipments more frequent. If the additional logistics costs exceed the benefits of the freed-up funds, acceleration will result in a loss. For example, you reduced the cycle by a day, but paid more for it than you freed up from inventory. There is another risk: small batches are usually more expensive to purchase. It is very important to calculate the economics as a whole, otherwise you can speed up processes but end up reducing profits.
Many believe that growth always requires additional investment. But often, it is enough to shorten the logistics cycle, according to LLC «FabriQuanta». With a shorter cycle, the same working capital can serve a larger volume of goods. In other words, a business can grow simply by ‘turning over’ the same funds more quickly.
It is important to understand that acceleration is not always free. Fast delivery can be more expensive, batches can become smaller, and shipments more frequent. If the additional logistics costs exceed the benefits of the freed-up funds, acceleration will result in a loss. For example, you reduced the cycle by a day, but paid more for it than you freed up from inventory. There is another risk: small batches are usually more expensive to purchase. It is very important to calculate the economics as a whole, otherwise you can speed up processes but end up reducing profits.
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