Managing your inventory levels is not the most exciting activity but is nonetheless critical in maintaining a good cashflow cycle for your business. It is critical because the amount of stock you own represents money that is tied up and cannot be used to pay your bills or re-invest in your business.
Thus, inventory levels that are too high or too low can have a significant impact on your ability to manage your incomings and outgoings. Here are a few tips on how you can effectively control your inventory to ensure you have just enough stock to meet demand.
Forecast your sales
Knowing how much stock to order or manufacture is dependent on the volume and value of sales you are expect to make in the coming quarter or year. The more likely you're able to sell all your stock at the desired price, the more cash you have to play with. Forecast your sales by asking yourself how much you can realistically sell in a given period, by using data from your sales history and market research.
Retailers may want to use their sales forecast to determine their "open-to-buy" amount - this is calculated by adding the dollar value of any planned discounts to your sales forecast and planned end-of-month inventory. Then, subtract your planned end-of-month inventory value from this amount to give you an open-to-buy amount, which will ensure you have enough stock to meet estimated sales.
Create your purchasing plan
A purchasing plan is like a blueprint for inventory control, as it determines when you need to replenish stock, how much to spend, what type of supplies you need to order and the quality of the supplies. This means there are no unplanned purchases that could come as a shock to your cash flow at the end of the month.
The employee responsible for purchase management should also be involved in:
- searching for reliable suppliers
- negotiating prices
- calculating quality/timing of deliveries.
Monitor existing stock levels
Once you've forecasted sales and ordered the right amount, the next step is to keep track of your stock levels. More often than not, employees miscalculate the number of items you have, things go missing during the delivery process, orders are delayed and databases can fail.
When one thing goes wrong in the supply chain process, it can have a significant impact on your cash flow. Your business does not get paid for goods your customers don't receive, affecting your forecasts and the ability to make your own payments.
Ensure that all stages of your supply chain are reliable by reading supply chain basics and how to manage supplier risk. You can also consider investing in a barcoding system to ensure accurate inventory tracking.
Discount your excess stock
Unsold stock represents money that you could be using for other areas of your business, particularly if your stock is seasonal (e.g. clothing) or likely to become obsolete in the short term (e.g. technology). If months go by and you find yourself unable to rid yourself of excess stock or dead inventory, you may want to consider discounting your prices.
Alternatively, you could list your stock online (e.g. eBay, group-buying websites) or sell them to a third-party such as wholesalers, stock buyers or overseas buyers.