Dynamic Business Logo
Home Button
Bookmark Button

Cash flow and inventory basicsThe number one reason businesses fail is bad management. Stock control is a vital issue that tends to be overlooked. Inventory management is important so your business knows exactly what’s coming in and what’s going out.

You should control the amount of stock you have because for every dollar you spend on stock, that means interest you pay to the bank for that stock.

And that comes back to cashflow. Profitable businesses can still fail if they are cashflow negative. With the global financial crisis bearing down on the Australian economy, it behoves any business to carefully examine their business practices and avoid being a casualty of a recession. Stock control is just the kind of business practice which can be overlooked, but is vital to the overall health of your business.

The vital questions
The question you need to ask is what is your business cash doing? If it’s unnecessarily tied up in inventory, then it’s not really working for your business.

In times when your debtors may be taking longer to pay, having a lot of money tied up in stock can negatively affect your business; the cash simply won’t be available if it’s needed elsewhere. The importance of having your cash in hand and not sitting in your stockroom can’t be underestimated. Businesses which are “asset rich and cash poor” may seem to be thriving—they enjoy good sales and good growth—but they still go under because they lack the cashflow to meet day-to-day business needs. If you have valuable cash tied up in stock, we have some ideas for getting it to work better for you.

For many businesses, stock is the single largest investment that the business has. It’s the task of the business to sell this stock for a profit within a reasonable period of time. Sounds simple enough but between the theory and the practice there are plenty of traps for unwary players.

What are you really paying?
Take, for example, the incentive to buy in bulk to receive lower prices for your stock. Shaving a few cents off each item you buy can mean more money in the bank when you sell later on. On the face of it, it sounds like a good idea. However, when you count up the cost, it mightn’t be such a good deal after all. If you buy more stock than you need, you’ll have to store the excess and there’s a risk of spoilage before it hits the shelves. To protect your investment, you’ll need to insure it. You’ll also need to factor the cost of the money you’ve spent on the stock and if you paid for it on your overdraft, the interest you’re paying gets added to the cost of buying and warehousing the stock.

The flip side of buying in bulk is just-in-time purchasing. Here you only buy what you can turn over in a short space of time. This works well to minimise the amount of cash you have tied up in stock. However, you’ll be receiving more deliveries for the same amount of product so your handling and administration costs will go up and, if your suppliers don’t come to the party and deliver on time, you could lose customers if you don’t have what they want when it’s time for them to buy.

Work with your suppliers
If you look at the large retailers, they practically use their suppliers as virtual warehouses, only ordering the minimum amount of stock for the shelves, and ensuring their suppliers have plenty of available stock, so they don’t hold too much themselves. Obviously SMEs don’t have the power of the large retailers, but this doesn’t mean you can’t examine your relationships with your suppliers and improve how you work with them to control stock.

With tough economic conditions, it’s also a great time to renegotiate prices on your stock as there are a lot of bargains to be had. And as callous as it may sound, there are great bargains to be had if receivers move in and sell the assets of an insolvent business. Again, though, it needs to be relevant. If you’re buying something you won’t be able to sell, you’ll be doing your business more harm than good.

When stock is a large part of your business assets, it’s also where you can make considerable savings by instituting good management practices. These practices start with policies for receiving and handling of stock and returns. The policies should be in writing and they need to be enforced throughout the organisation.

Don’t become obsolete
Obsolete and slow moving stock are an absolute cashflow killer for any business. This is perhaps more relevant than ever when trends change so quickly and technology moves at an unprecedented pace.

This is why many internet businesses have been so successful. They’re able to move quickly, don’t necessarily hold large amounts of stock or pay traditional overheads. There will always be a demand for bricks and mortar businesses too, but you can take some of these lessons from what works on the web and adapt them to your business.

Take action
There’s always a temptation with cashflow issues to blame late accounts and other factors for making your business cashflow negative. Of course there are aspects of business that may well be out of your control, but there are plenty which are. And taking positive steps to address issues such as stock control will improve your business and assist you in taking responsibility for the things you can control.

Inventory management software can help you manage your stock by providing detailed data that can be analysed to help you make better decisions about what you purchase, when and in what quantities. It’s one of those business costs which can pay for itself a thousand times over if you use it properly to better manage your business. However it’s subject to the GIGO principle: if you put garbage in, you get garbage out. If your stock isn’t correctly labelled, for example, forcing your staff to sell it under a miscellaneous category, you’ll be unable to determine what you’re selling, when or at what price. To be effective and available as a management tool, data must be recorded accurately and thoroughly.

Good stock management doesn’t just happen, it has to be planned for and worked at. The good news is that getting inventory under control can have a positive affect on your business cashflow and that’s good business.

—Rob Lamers is CEO of Oxford Funding (www.oxfordfunding.com.au), a subsidiary of Bendigo and Adelaide Bank Limited, which has been providing debtor finance services since 1994.

People who read this, also liked:
To discount or not to discount?
Cash flow survival tips

What do you think?

    Be the first to comment

Add a new comment

Rob Lamers

Rob Lamers

View all posts