Do Investors Have Available Capital ?

Given the current economic turmoil I advise you to closely ask any potential investor in a project what their available capital is.

There are many venture capital and private equity managers that are still in business, and interested in reviewing things, but when push comes to shove they do not have the capital.

Recently LCC had a series of meetings with a well known PE manager in Australia.  After some weeks, however, we learned that the investor had enough money to pay their fees, but little else.  Additionally the planned new fund that that manager had for 2009 was put on ice.

So early in any discussion make sure you are aware of the investments that the party you are holding discussions with have made, and additionally what their free cash for each investment is.

Managing Inventory Down in a Recession

Today I had a long conversation with a very experienced businessman who was under pressure from a supplier.  This individual has had a very successful track record of managing (and making money from) the hospitality industry.

The issue was a pretty simple one as to why pressure was mounting :

• Inventory levels had been managed down slowly, but not swiftly enough to mirror the deteriorating economic climate.  The decision was a simple one - to stop ordering from a key supplier for a few weeks and to run inventory down.
• A new competitor had opened in the vicinity of the main establishment in the immediate past.  This had had the effect of distorting the typical inventory days for a number of product skews.  The opening of this competitor was no shock, and should have been planned for.
• With a tightening economy the number of days inventory was held in various products (skews) had increased.  A conscious effort was made to rebalance the inventory landscape by liquidating this slow moving stock as cost + 5% to allow capital to be freed and higher turnover inventory to be brought in.

The result was that the initially horrendous picture was not bad at all.  It could have been avoided with a little forward planning.

So in a volatile economy manage inventory levels tightly.  It is better to forego a little bit of margin and order more frequently than just let inventory build up - as the financing cost on the holding of slow inventory will equate to the discount given to clear out.