This month’s article on cash flow management asks you to scrutinise your inventory and gives you some tips for boosting your cash flow quickly.
This is the ninth part in our ongoing series on cash flow management, you can read the previous articles here:
- Part One: Cash Flow Basics
- Part Two: Failure to Plan is Planning to Fail
- Part Three: Those Who Shout Loudest Get Paid First
- Part Four: Must Have or Lust Have
- Part Five: Working Capital – Make it Work for You
- Part Six: Shelter Your Assets
- Part Seven: You’ve Got to Innovate to Accumulate
- Part Eight: Treat Your Suppliers Like a Bank
Part Nine: Take Stock of the Situation
If your business deals with physical stock, you’ll need to have a strong stock control process in place to manage your inventory effectively, boosting sales and keeping costs down. It costs a business an estimated 10-30% of the product’s value to hold stock, what with the price of storage, insurance, keeping accurate records, and preventing theft. It all adds up and as a result, it may not make financial sense for you to hold onto as much stock as you think.
If you need a simple way to check whether your current stock planning is effective, use the ‘stock turn rate’ calculation. Just divide the cost of goods sold by the cost of stock on hand. A low stock turn rate means you’re moving stock too slowly and could benefit from reducing the amount of stock you keep.
Monitor Stock Levels
You need to find a balance between holding enough stock to satisfy customer demand and needlessly paying for storage. There are dedicated pieces of software you can use, or a spreadsheet or ledger, but whichever method you use it’s absolutely essential to keep your records up to date. And make sure you give the job to someone you can trust, or put additional failsafes in place to protect against theft.
Having large amounts of stock on hand just in case a big order comes in isn’t the most efficient want to manage your cash flow; if possible, keep only the bare minimum of stock in house and negotiate quick delivery from your suppliers for when an order is made.
Reduce Slow Lines
Figure out which items are your bestsellers and which make the most gross margin (and if they’re the same product, then all the better!), and focus your energy on these products.
Reduce the number of lines you offer that aren’t big sellers – make a list of old, excess and slow-moving lines and come up with a plan to offload them. Whether it’s donating them to a good cause (which has the added bonus of some good publicity for your business) or selling them at a loss. You might not make any money, but you can reinvest the cash you do bring in into new lines that sell better.
Negotiate with your suppliers. Unless you’re selling a large number of a particular item, avoid volume discounts and look for quick settlement discounts instead. If your current cash flow situation doesn’t allow for quick payment, ask for smaller, more frequent deliveries from your suppliers. This will not only reduce your excess stock and reduce costs, it’ll also improve your cash flow as your payments will be more regular, smaller and spread out.
If your current supplier can’t meet your new requirements, you might want to consider shopping around and finding one who will. Don’t compromise on quality though, your long-term customers will notice and you could end up losing sales rather than saving money.
Don’t delay on sending out invoices. The sooner you ask for payment the sooner you’ll receive it. Keep payment terms shorter than necessary and be prepared for late payments.
A good credit control process is essential if you’re hoping for prompt payment, and a positive cash flow.
The next post in our cash flow management series, Balance the Bank, will look at the most important relationship in your professional life: the one with your bank manager.
Don’t want to wait? Click here to get our guide, Happiness is a Positive Cash Flow and read all our tips and advice for achieving and maintaining a positive cash flow.
Get in touch to discuss your individual circumstances and get some independent, impartial advice on your business’s financial health.