Cashflow: Managing inventory


For any business dealing with inventory, one of the biggest struggles is the challenge of effectively managing stock on an ongoing basis.

Inventory management is often one of the key ingredients to growing a successful business and businesses typically have a lot of cash tied up in stock – often resulting in cash flow challenges as well as barriers to expansion and investing in purchasing more inventory.

In fact, effective inventory and order management can be the difference between a business growing and a business failing. And, with 33 per cent of SMEs looking to grow their businesses in 2016 by adding new products of product categories, according to the 2016 SME Directions survey, having good inventory management makes good business sense.

Here are the five most common key reasons you may need to improve the way you manage your inventory to save time, make money and get deals out the door faster:

1. Cash flow improvement
Cash flow is small businesses is crucial. In fact, in the 2016 SME Directions Survey, 29 per cent of small businesses said that cash flow was their number one concern and 20 per cent said cash flow was restricting their ability to purchase inventory.

When a business holds optimal levels of stock, the impact on cash flow is significant. Working capital is freed up, handling costs are reduced and stock holding can be minimised. Plus, if the business is able to buy products just in time to supply customers, you can limit warehouse shelf time and reduce storage costs.

Overstocking can be a costly mistake. Tying cash up in large amounts of stock can be a risky move, especially if the demand is not there. If the product ends up expiring or becomes obsolete, the stock has to be written off, or significantly discounted, potentially costing the business thousands of dollars.

2. Have real-time visibility over stock levels
Real-time stock availability and sophisticated data analytics of historical purchases allows sales reps to proactively manage both upselling and cross selling opportunities. Sales reps can be alerted to other items a customer has purchased previously or items other customers have purchased when purchasing the same item.

In instances when sales orders are booked for items that need to go on “back order”, there is a high potential for the customer to cancel the order. With real-time access to inventory available at the time of making the order, sales reps can recommend a substitute.

3. Faster processing
The order fulfilment process can be made much more efficient by implementing a few changes within the business.

A good understanding of your inventory performance will allow you to reduce your fulfilment times and purchase products “just in time” to supply your customers, meaning warehouse storage time is lessened and turnover is much faster.

The last thing a small business owner wants is stock sitting around, ultimately costing the business money and impeding growth.

4. Reduce slow moving stock
If you have a clear picture of your inventory you have better visibility over which stock is moving quickly and which stock needs a shake-up to get it out the door. After all, the slow moving stock is what’s really costing you, causing reduced cash flow by tying up cash in stock that’s just sitting on shelves.

Being able to identify this stock means you can put sales strategies in place to move stock, improve ordering of inventory to better respond to customers’ purchase habits, and ultimately improve sales.

5. Manage suppliers better
When you start thinking about inventory, it’s natural to think about the other factors which impact your overall stock situation. For example, are your suppliers taking a week to deliver stock that flies out the door the next day due to popularity? Are they delivering on time and as promised, with complete shipments and without missing items or components?

It’s important to identify inefficiencies and drill down on these points. When you have robust inventory management, you have a better understanding about how your suppliers are impacting your inventory levels and also sales.

Let’s face it, for many businesses inventory is pivotal to your operation and if management practices aren’t up to scratch, it won’t take long before it takes a bite out of profitability and the sustainability of your business. By putting in place solid inventory management practices and tools, you can be sure your business is supported.

Why your business needs an inventory management system

Whether you sell wholesale, retail or online, lack of inventory management can damage your business operations. Here are some of the most common problems we see.

Of the many small and medium businesses we have worked with, those that have the most difficulty managing business growth are almost always those with inventory. When they start out they may be able to manage their inventory manually – perhaps aided by Excel – but as they grow this very quickly becomes impossible.

Problems that can arise through not having an inventory system

As businesses grow, the complexity of managing inventory grows too. Once you have multiple salespeople, or you split the roles of selling and buying, it becomes almost impossible to keep on top of what is in the warehouse, let alone what is committed on customer orders, and what is currently on order from suppliers.

The problems this can cause include:

  • Inefficient order processing

    Without a stock system both sales and purchase prices need to be manually checked, invoice descriptions have to be manually keyed, account and GST codes have to be manually entered. This all results in wasted time.

  • Business inefficiencies

    Having to manually check stock levels, split orders and call back customers to explain that you cannot fulfil their whole order also wastes time and add costs.

  • Missed sales orders

    You will receive (and maybe process) customer orders, only to discover you are out of stock of one or more items on the order. This results in loss of profit on the sale, additional costs of filling the order later, and (worst of all) a dissatisfied customer.

  • Overstocked/understocked at the same time

    Most businesses will find they will miss some customer orders due to being out of stock on some items whilst at the same time carrying excess stock of other (slow-moving) items. These overstocked items harm your cash flow, take up space in the warehouse and add to operating costs.

  • Over-reliance on key people

    Probably you, the business owner! The one person who knows what stock you have and where it is, what is on order and which key customers are likely to place an order next week suddenly becomes indispensable. Unfortunately that means never getting sick, never taking a holiday and never working on any other aspect of the business.

  • Lack of management information

    For example, which customers are buying which products and which products or product groups are most profitable.

All too often such businesses are damaged by their lack of systems and struggle with lower growth, higher costs and lack of cash. Sometimes they fail altogether. But solutions suitable or any size of business are readily available, and – with a little preparation – easy to implement.

So what is an inventory management system?

An inventory management system is one that records information relating to the physical items you buy and sell. As long as you record all of your purchases (supplier invoices) and sales (customer invoices) your inventory will always be up to date. More advanced inventory systems have far more features, such as manufacturing (or assembly) and order management.

“Solutions suitable for any size of business are readily available, and – with a little preparation – easy to implement.”

At the most basic level you will need to set up the items you sell (a unique code and name for each item) and a few simple pieces of information: the price you sell it for, is the item subject to GST and so on.

Often – even with a basic system – you will get more out of the system if you spend a little extra time on the set up, adding in such data as the preferred supplies and the “minimum/maximum” levels. More on this in a later article.

All of the popular small business accounting systems – such as MYOB, Xero, Quickbooks – include some inventory functionality. These solutions should be within the reach of and of benefit to even micro businesses.

Next month we’ll look at the key features of a basic inventory system, and how you can get started setting this up in your business.

In the meantime … is managing your inventory a problem for you? Do you have any questions I can help with?