Manage Your Inventory To Avoid Tying Up Your Cash!
In our last blog post we did a deep dive into managing accounts payable to conserve cash. The fifth part of our series of blog posts on cash flow will do a deep dive into another cash flow driver – inventory.
It is absolutely critical to manage your inventory the right way to avoid tying up cash. The crux of the issue is you are outlaying cash when buying inventory and you don’t get it back until you sell it. When inventory is well managed it moves quickly with minimal amounts on hand at any one time. The issues happen when inventory is not turning over fast enough and sits on the shelf for too long – thereby not being converted into cash.
There are also the added problems of adding to the overhead expenses of the business due to the cost of storage, the risk of damage on the shelf and becoming obsolete. The longer inventory sits on the shelf the harder it is to sell. At this stage your options for offloading it become somewhat limited and you can be reduced to marking it down, selling it to discounters or writing it off altogether. More often than not after a certain amount of time you will get a lot less cash back than what you initially outlaid.
Fortunately there are things that can be done to reduce the problems associated with having inventory.
Some good practices to get into include:
- Use software to manage inventory. Many accounting packages have an inventory management tool that makes it easy to put a dollar value on it, provides a central database and reports that identify trends.
- Have a system in place to determine the inventory demands for the business. For example you will need to determine what products are seasonal and what products don’t sell well generally. Once you understand the inventory demands you can take appropriate actions such as cutting back on inventory that doesn’t sell or limiting seasonal inventory.
- Understand how long it takes to re-order inventory as suppliers vary as to how long they take to deliver products. A lead-time report out of your software should be sufficient for this purpose.
- Measure how often your inventory sells and how long it takes to get into the hands of your customers.
- Do regular stock takes.
Next month we will continue our series of blog posts on cash flow where we will discuss how to manage your work in progress to ensure you keep cash coming in during those long projects.
What processes do you have in place to manage your inventory and what are the issues?
Would love to hear your thoughts!