Increasing CF Turnover is the Key to CF Management
[Summary]
According to certified public accountant So Hayashi, for example, when adding prosciutto to a restaurant menu, if the sales and profits are the same whether you buy a whole leg of prosciutto to slice and sell or purchase pre-sliced prosciutto daily, buying the pre-sliced prosciutto daily is more capital-efficient because it requires less inventory.
[Main Text]
Following the previous entry, I would like to discuss what I learned from reading the book by certified public accountant So Hayashi, "Accounting You Won't Be Deceived By: How to Read the Truth Behind Corporate Numbers" Last time, I explained that according to Mr. Hayashi, Dell Computer used to increase its cash on hand by collecting sales proceeds immediately through made-to-order production, holding no inventory by outsourcing production, and negotiating to delay payments to suppliers, and that such efforts can enable debt-free management.
Following this, Mr. Hayashi discusses that it is more efficient and desirable to minimize the funds used in business activities. "For a company, cash is like blood. Inventory, accounts receivable, and accounts payable are what impair blood circulation or cause anemia. By improving these three points, you can turn negative operating cash flow into positive. How can you not only resolve the negative and improve blood flow, but also increase the volume of blood itself to significantly increase positive operating cash flow? (Omitted)
For example, let's say you add Iberico ham to your restaurant menu. There is a method of buying a whole leg from a specialty store and slicing it in front of the customer, and a method of buying pre-sliced ham. Buying a whole leg costs 100,000 yen. You sell it over a month for 300,000 yen. Alternatively, you buy 1,000 yen worth of pre-sliced ham daily as needed, and sell it for 3,000 yen per pack, selling 100 packs a month. If you calculate it, the cost is 100,000 yen, sales are 900,000 yen, and profit is 200,000 yen in both cases; they are exactly the same.
"Some might say, 'If that's the case, buying a whole leg looks better and becomes a signature menu item for the shop.' Do you think so too? Certainly, a large chunk of prosciutto looks delicious and impressive. However, from an accounting perspective, there is a decisive difference between the two methods. That is the 'turnover' of funds. Selling 100 packs in a month means you only need to sell 3 to 4 packs a day. You can start with 3,000 to 4,000 yen, but if you buy a whole leg, you need 100,000 yen in funds upfront.
If you don't have 100,000 yen on hand, you will have to borrow it, which reduces your profit by the amount of interest. Furthermore, whether you bought it with your own funds or with borrowed money, buying a whole leg means holding inventory. Holding inventory means keeping cash in a state of suspended animation during that time. While it is sleeping, it might spoil, be eaten by a cat, be stolen, or there is a risk it will remain unsold.
If you buy by the pack, you only need to buy what you can sell in a day. The risk of holding inventory is almost zero. Without taking on risk, you can generate the same profit that 100,000 yen would generate over a month with just a few thousand yen. Even if you have 100,000 yen on hand, if you use the remaining money to buy other ingredients and make dishes, you can also earn additional profit. 'Turning a small amount of capital with high turnover'—this is the most important point of cash flow management." (Page 167)
If you can earn the same sales and the same profit, it is clear that having less cash on hand is better. When I consult with people who are about to start a business, I also recommend that they create a business plan that keeps their cash on hand as low as possible. The reason, of course, is that if the business does not go well after starting, the loss will be smaller. However, there are times when a business goes better than expected after starting, and in such cases, I sometimes feel that I should have invested more funds to increase the scale of the business.
However, I believe that since a company's management foundation at the time of startup is fragile, it is more desirable to suppress risk even if it results in missing out on profit opportunities. Instead, you can minimize the loss of profit opportunities by deciding on countermeasures in advance for when the business plan exceeds expectations, and by making preparations such as ensuring you can receive additional financing immediately. To that end, after starting a business, you must keep accurate accounting records so that you can grasp the income and expenditure situation in a timely manner.
By the way, having a lot of inventory is not necessarily just a disadvantage. In the example of prosciutto mentioned above, if you have a whole leg of prosciutto, you can respond even if there are 5 or more orders for prosciutto in a day. You can also save the effort of purchasing ham every day. Of course, the risk of having a large inventory does not disappear, so it is important to aim for an optimal state while considering the risks of both once the business activities are on track.
2026/2/15 No.3350