Question

Discuss a management strategy used to retain or increase cash. Share an example of a time when you’ve used a similar strategy in your personal finances. How are the applications of these strategies similar or different for businesses and individuals?

Answer 1

A management strategy used to retain or increase cash is to systematically examine its inventory levels. For most of the corporate entities around 80 percent of their profits come from 20 percent of their products. Not all products are winners for a company. Take the example of a company like P&G (Procter and Gamble). The company makes and sells a large number of products and brands but still the company derives a chunk of its revenues from few brands like Tide, Head and Shoulders, Pantene etc. The strategy that the company’s management uses is to optimize its inventories and not have too much inventories of products that are not best sellers. This helps the company to lower its working capital requirements and hence retain cash by not tying it to unnecessary inventory investments.

An example of a time when I have used a similar strategy in my personal finances is when I was constantly falling short of cash. I then applied the policy of optimizing my investments in my inventories of requirements like groceries, vegetables, toiletries, and other items of personal care. I started not buying goods that I do not use in a regular manner. For instance I stopped stocking up on bottles of carbonated drinks, on hair conditioners, on skin toners etc. I used to buy these products but my use of these products was limited to rare occasions. Now I have stopped investing and buying these products altogether and hence I have been able to free up my cash and retain more of it.

The applications of this strategy is similar for businesses and individuals in the sense that the underlying principle is the same in both cases i.e. invest more in products and items that are regularly and often required offload investments in products that are seldom required. The difference lies in the implementation part. For a business the implementation has to be done in a systematic manner so that the process becomes sustainable for the long term. For an individual a highly systematic approach is not required.