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How to free up cash from your inventory

Go into your stockroom or warehouse and have a look at your inventory. Now imagine the inventory as bags of cash you can’t get your hands on until it is sold. If you can manage this inventory better, you can reduce your debt load or release cash into your business.
To achieve this, the four key areas you should look at are your:
 

  1. Purchasing strategy
  2. Clearing excess inventory
  3. Reducing accounts receivable
  4. Aligning purchase and sales budgets.

     

Similar principles apply for wholesalers and retailers – what, how and when you purchase and sell inventory may have a great impact on your cash flow. 

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 which could help you generate cash for your business.


1. Incentives

Time-limited customer discounts offered generally or to favoured customers can help sell 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. Commissions

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


3. Marketing Initiatives

  • If you haven’t been successful promoting through existing channels, are there new distribution channels you can offer this stock through?
  • Bundling with other products to achieve greater overall sales and still get a reasonable return without being seen as a discounter
  • eBay / auctions / 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-offs

Focusing your energy on profitable existing products or new initiatives can yield greater results than 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 your past mistake.


5. Donate it to charity

This achieves the same result as writing stock off except it has the added benefit of helping out those in need.

 

Large accounts receivables or slow stock turnover can cause profitable businesses to go out of business or significantly constrain growth by tying up cash. To reduce your receivables consider these strategies:


1. 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 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. 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.

 

 

If you've an existing business, 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 influence 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 consignment stock, just in time ordering and pre-sales) may help you avoid tying up too much 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.  


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Options to cover cash shortfalls

Cash shortfalls will affect most businesses, sometimes seriously. Find out what may help avoid or reduce cash flow chaos.
 

Upgrading equipment or premises

Looking to upgrade how and where you do business? It's important to consider the financial implications and how to do it cost effectively.

Things you should know

This information does not take into account your personal circumstances and is general. It is an overview only and should not be considered a comprehensive statement on any matter or relied upon. This information including any tax information provided in this article should be used as a guide only. We recommend that you seek independent professional legal and tax advice about your specific circumstances.