1) Make sure you are not holding more stock than you need
Holding more stock than you need is never a good idea. Excess stock can literally be dead money taking up space and locking up your cash flow. As interest rates increase it can also be very expensive to fund.
While funding has been accessible and rates low, it can lull businesses into a false sense of security that they can perhaps take advantage of a “good deal” and stock up while the price is right etc. This kind of thinking can however lead to disaster as your free cash flow dries up and interest rates start to rise.
You would have no doubt heard of lean manufacturing and “just in time” ordering in the manufacturing environment. This concept is to have just enough stock for the production cycle at any point in time and no excess. This keeps your cash requirements in stock low. The just in time theory may not always be as easily applied in other environments where say items need to be imported or there is a long lead time etc from your supplier, it is something that you should think about applying to your business.
Advisers and accountants often talk about your “inventory turn” in terms of your business operating cycle. Inventory turn is the number of times in a year your inventory is completely turned over. If say, your cost of goods sold is $500,000 and you hold $100,000 in stock, your turn rate is 5 times. From a business management perspective the higher the rate of inventory, turn the lower the amount that you have invested in inventories and therefore the lower the risks for your business. It is therefore an important that you have a goal of maximum inventory turns. It will free up your cash and free up your warehouse!
You will need to consider your buying patterns. You obviously need to have enough stock to meet customer demand, so give thought to lead times on products. Is it possible to order less more frequently?
Although volume discounts and shipping costs can mean the price per unit may increase if you are ordering smaller quantities you will need to compare this to the cost of holding that stock for longer than you need to. There is the financing cost, the warehouse storage space being occupied as well as the opportunity cost of what you might be able to do with your money if it wasn’t tied up in stock.
Understanding your sales patterns comes from having good data and systems to track which customers are buying which items, when and in what quantities. This information is critical in you setting your buying strategy.
2) Organise your inventory for better accessibility and visibility.
Make sure you know where your stock is. Organise it so that it is accessible and visible when you need it. You don’t want to be in a situation where your inventory management system is saying you have items in stock but you can’t find them when your customers want them or even worse “mystery” boxes of stock popping up and surprising you. You can’t sell what you don’t know you have. Good organisation of your storage area will keep things in plain sight and at hand when needed.
You should also consider investing in good inventory tracking software or add-ons to your accounting system. This will streamline your stock takes and keep the information you need about your stock holdings at your fingertips. There are quite literally a myriad of different stock management applications that can integrate to your general ledger, online store, point of sales and other systems. Speak to your adviser about how to select the best option for you and your business.
3) Look to maximise the credit offered to you by suppliers
Supplier terms of trade will also be important in your buying strategy. Looking at credit terms that suppliers offer, it is a low cost tool in funding your inventory.
As we move more to the digital marketplace and online shopping small businesses might also find it easier to purchase goods direct online. This will generally mean that payment is required before the goods ship. Again, you may be able to source a better per unit price this way but you will need the free cash flow to fund the purchases.
An alternative is to look to more traditional supplier that do offer trading terms. In this case matching your stock orders to the terms offered will help you maximise your cash flow. Ideally, if your suppliers offer 30 day terms you would only order sufficient stock to cover 30 days sales.
Some suppliers may allow terms which are a set number of days after end of month. Where this is the case, consider ordering inventory earlier in the month to maximise the number of days you have available to sell the goods before having to pay for them.
4) Focus on your stocks “best before” date and take action to minimise obsolence.
Another really important consideration is the life of the product. Is there a risk that it will be come obsolete before you have the opportunity to sell it or does it have some other “use by” or “best before” date consideration. The longer you hold your stock the higher the risk that you may have to dispose of it before you can sell it.
Slow moving stock is a problem in many businesses. While we all want to maximise our return or profit margin on our stock purchases, sometimes it is best to accept that you may have made the wrong call about some items or that the market has moved and see if you can sell them at a discount before those goods become obsolete.
A good handle on your operating cycle and stock requirements will keep your cash working for you and clear out your storage areas, keeping you focussed on high value sales and services. Whereas a lack of focus on your stock levels can really cost you more than you may realise.
