Strategic Cost Transformation by Reginald Tomas Lee

Author:Reginald Tomas Lee
Language: eng
Format: epub
Publisher: Business Expert Press

CHAPTER 8

The Cash Dynamics of Capacity

In Chapter 7, we talked about the differences between input, or static capacity, and output or dynamic capacity. One of the key differences is that you buy input, not output capacity. When you hire a manager, you are buying her time, not her decisions. This gives you access to her decisions, but you are not paying her on a decision-by-decision basis. Of course, when you buy input capacity, you must pay for it, creating the tie between input capacity and cash. Given the notion that most companies are fundamentally capacity based, it should follow that most of what the company pays for is capacity. If that is true, then the largest influence of cash, specifically cashOUT, is capacity. That makes understanding the relationship between capacity and cash dynamics and what levers you have to manage them critical. To reach the goal and to make money for the firm, you will have to get your arms around the cash dynamics of capacity. When you understand the dynamics, you will make decisions knowing, in foresight and more precisely, what the impact will be on cash. You will not be bamboozled by huge value propositions that have no basis in cash.

To create this understanding, I’d like to take you through the three key points to understand about the cash dynamics of capacity.

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