How to free up cash from your inventory

Go into your stockroom or warehouse and consider your stock levels. Now imagine this inventory as bags of cash you can’t get your hands on until the stock is sold. If you can manage your stock better, you can reduce your debt load, release funds into your business and improve your cash flow.

Ways to manage your inventory to help improve cash flow

What stock you purchase; how you go about building your inventory; and when and how you sell the stock on; may all have a significant impact on your cash flow. Similar principles apply for both wholesalers and retailers.

This article provides tips and ideas across the four key areas of purchasing, controlling your financial outlay, aligning budgets and clearing excess stock.

Be smarter with your purchasing strategy

Do you get excited by discounts on bulk purchases? Or place regular standing orders regardless of sales forecasts, then find yourself with significant amounts of unsold stock? If these situations sound familiar, refining your purchase strategies may address the risk of over stocking and the resulting cash flow implications.

Here are eight things you can do:

1. Match customer ordering patterns
 

• Maintain levels of fast-moving stock
  
• Don’t over order slow-moving stock
• Consider trimming your range of slow-moving products if they are difficult to buy in small quantities for reasonable profit margins.

2. Simplify product options

Remember, we’re all overloaded with choice these days and your customers may value a more selective range of products.

"Any customer can have a car painted any colour that he (or she) wants so long as it is black" was the famous philosophy of Henry Ford. He developed and manufactured the very first automobile that many middle-class Americans could afford.

Ford’s theory still holds. If you can reduce the number of colours, sizes or technical specifications that you stock on a product, then you can reduce the risk of remainder stock and the complexity of managing your inventory. If your business is a café for example, think about simplifying your menu.

In taking this approach, you are balancing the risk of reduced sales against the costs of unsold inventory and potentially dealing with a large range of suppliers. To minimise the risk of lower sales you may be able to offer other options on demand.

3. Improve your systems

Over ordering, misplaced stock and time-sapping purchase orders are often caused by poor ordering and stock management systems. Here are some actions you could take:

 

• Improve your database/accounting system to better show inventory in stock
• Have a single point of contact for purchasing
• Receive stock into your system as soon as it is delivered
• Clearly label product locations to help you find stock more easily
• Develop handling procedures to reduce damage or wastage
• Carry out regular stocktakes to identify where cash may be hiding in your business.

4. Implement Just-in-Time ordering

Is there a way you can streamline your ordering process, so you can order the stock after you’ve made a sale? You’ll have to:

 

• Work closely with customers to establish the turnaround times they require on orders
• Establish the speed that your suppliers can provide goods.

If you can receive and dispatch stock to your customer quickly enough, it’s well worth considering ordering stock when your customer places their order.

5. Ease up on purchasing

Is your storeroom, garage or shop bursting at the seams with unsold product?

This is a tell-tale sign you have too much stock and a perfect opportunity to sell down your inventory and release cash back into your business. Ask yourself the hard questions about the real value of this stock and use existing and new channels to actively sell down stock. Ideas for this are listed later in this article and in our 9 ways to move dead stock article.

Even if your inventory appears to be in control:

 

• If stock has built up in some areas, consider selling down some stock before making your next purchase
  
• Before responding to tempting offers or requests for orders from suppliers, carefully consider whether you need the stock right now
• Evaluate regular standing orders, which can be a big cause of overstocking.

6. Buy in smaller quantities but more often

The argument for and against bulk purchases should be a financial decision. Factors to consider are:
 

• Buying bulk stock can be risky and have adverse consequences such as:
  • Stock becomes obsolete
  • Leftover stock from current promotions needs to be sold at clearance prices reducing profit margins
  • Major customer goes bankrupt or reduces their order leaving leftover stock.
• Buying in bulk may reduce your borrowing capacity in other parts of your business:
  • High volume purchases require greater levels of finance.
• Higher interest charges on higher average balances may negate any additional discount you receive
  
• Bulk buying may increase freight and administration costs.

7. Buy on consignment

Buying stock on consignment means you only pay for the stock you sell – and have the right to return it without obligation.

This shifts the purchasing risk onto your supplier while giving you stock on hand to sell immediately. It can be a good way to test new product lines, though some additional freight costs may apply for returning unsold stock. 

8. Outsource

Do you need to hold inventory of every stock item you sell, or can you outsource this function and the dispatch of orders of these products to a third party?

When evaluating a potential partner, some questions to consider are:

 

• Do they hold items that you sell occasionally in their inventory?
  
• Can they send orders directly to customers on your behalf?
• Are they reliable and not a direct competitor in your core markets?

From a financial perspective, consider your costs of ordering, storing and dispatching stock to customers compared with outsourcing this requirement.

Reduce your accounts receivable

If accounts receivable (the money owed by customers) is high, and stock turnover is slow, this can cause profitable businesses to go out of business – or can significantly constrain growth by tying up cash. To help reduce your accounts receivable consider these strategies:

1. Offer pre-sales

Can you promote and take orders for new release products prior to launch?

If you have guaranteed orders this can give you a better idea of the likely future demand for this product and may even allow you to place a bigger upfront order and get a better discount. With suitable payment terms from your supplier, this will help speed up the working capital cycle because you will be paid on launch date and may not need to pay your supplier until after your customer pays you.

2. Request deposits

Are you able to ask your customers for a deposit when they order?

This could reduce your financing demands and associated interest charges and also reduce the risk of cancelled orders. Your accounts receivable should also decrease as customers have made a prepayment.

Align your purchase and sales budgets

If you have a trading history, looking at past results can help you determine average debtor days (how long it takes to get paid). Work closely with your suppliers and use this information to negotiate suitable tighter payment terms.

Seasonal influences may also affect your sales. Identifying these fluctuations could help you make better buying decisions. Buy the right stock at the right time and you should have sufficient but not excessive stock levels.

This is more difficult for new businesses – but adopting more cautious strategies where available (such as ‘buy on consignment’, Just-in-Time ordering and pre-sales) may help you avoid tying up too much of your cash in inventory.

Using this information to prepare your purchase and sales budgets can help you identify cash gaps, refine your plans, and minimise the amount of finance you need to run your business. Naturally you’ll want to detail all these plans and budgets in your business plan.

Clear excess stock (inventory)

Maximising sales revenue and profit margins are the usual drivers of sales strategy. These are important business drivers but what happens if things don’t go to plan? If you find yourself with stock that isn’t moving, here are some strategies that could help you generate cash for your business.

1. Offer incentives

Time-limited customer discounts offered generally or to favoured customers can help shift excess stock. As an occasional strategy this can work well and generate goodwill but if used too often there is a danger that your customers will wait for discounted prices and this can affect your profit margins.

2. Pay higher commissions

Salespeople may be reluctant to promote products that have sold slowly in the past. Increasing sales commissions for a short period on these underperforming products could give your salespeople a renewed enthusiasm and help clear stock.

3. Implement marketing initiatives

• If you haven’t been successful promoting through existing channels, are there new distribution channels you can offer this stock through?
• Try bundling dead stock with other products to add value, achieve greater overall sales, and still get a reasonable return without being seen as a discounter
• Online sales sites (such as eBay), auctions and local markets may be good channels to use because they are unlikely to interfere with your major marketing activities and can yield cash quickly.

4. Write off stock

Focusing your energy on profitable existing products or new initiatives can yield greater results than spending time trying to sell slow moving stock, particularly if you need to offer significant discounts. Writing off stock can free up warehouse space or shelf space and will also remove the reminder of what may have been a past mistake.

5. Donate to charity

This achieves the same result as writing stock off – except it has the added benefit of helping out those in need, which helps position your business as a good corporate citizen.

Some of these ideas and others are detailed in our 9 ways to move your dead stock article.