Stock effects cash flow

Being aware of your stock movements is pivotal to making sure you're not facing a cash flow crisis. The last thing your business needs is to face a shortage of cash because you've over estimated your stock requirements and as a consequence all your money is 'sitting on the shelves'. Below are some tips on how to get the cash out of your stock so you're free to do other things with it:

Know your stock needs

You and your staff need to be acutely aware of what kind of stock levels your business needs. It is helpful to think of necessary stock levels in terms of 'stock days', that is, the number of days that your business could run with a certain amount of stock. For example, a full store room might mean you have enough stock for 60 days, i.e. 60 stock days. However, you don't want stock sitting on the shelves or in the warehouse for months at a time as this is just tying up your cash. The aim is to successfully estimate the amount of stock you need to see your business through a particular period of time (preferably, the number of days in between orders) so that you don't have excess levels sitting around restricting your cash flow.

Implement KPIs

A list of Key Performance Indicators (KPIs) is a valuable tool to help you evaluate your inventory management. As mentioned above, 'stock days' is a key metric that helps prevent you from ordering stock too early or too late. It is also worth drilling down further into your figures to calculate the average number of shelf days for specific products as well as profit margins on all your items. The more information you can gather about your inventory, the better placed you are to make purchasing decisions that do not harm your cash flow.

Depending on your line of business, having stock sitting too long on the shelves can be very costly. A clothing store for example, needs to align inventory levels against certain seasons as there is little point in carrying summer items as winter is approaching. By developing a set of KPIs around stock movement you are taking the guess work out of ordering and limiting the chances of being off the mark.

Know your customers' needs

By knowing your customers purchasing habits you are much better situated to run targeted campaigns for shifting your stock. This is particularly relevant if you are holding items that are perishable or seasonal in nature (e.g. surfing gear). By having systems in place to help you move stock you are protecting yourself from running into cash flow troubles.

Get organised

Stock control is nine-tenths organisation. You might already keep tight written-based stock records - and if you find that works for you then you should stick with this system - but there are many advantages of using an electronic ordering and stock control system. Firstly, all information is recorded electronically so there is no chance of order sheets lying all over the place or going missing. Additionally, electronic systems can provide previous purchasing records and price information on demand, which enhances your ability to make well informed decisions. And with an ability to display pictures of items, electronic systems limit the chance of ordering the wrong item.
Organisation does not just stop at the ordering process; you also need to be prepared once the stock arrives. Have clear systems in place for the storing of items so they don't not magically disappear right when you need them most or magically reappear the week after you've sent off another order.

Get your staff on board

To successfully get your ordering processes under control you need to make sure your staff are up to speed with the system and knowledgeable about why maintaining control over stock levels is important to the health of your business. The last thing you want is spend a whole lot of time and energy implementing a new system only to realise none of your staff use it because they don't understand it.

The majority of small business failures result from poor cash flow. Consequently, it is imperative for the health of any small business to implement measures that help improve it. Putting in place systems for managing your stock levels and ordering processes might be a bit time consuming in the outset but they will help stop your cash from being tied up in inventory that you either don't require or isn't selling.  

Find out more about cash flow by reading managing cash flow for small business >>

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