The Inventory Lever to Increase Cash Flow in Your Small Business
As we discussed in our previous post, there are only eight things in your business you can manage to increase cash flow. Five of them are “permanent” increases to cash flow, while three of them are one time fixes. One of them is inventory.
Many businesses in our modern economy don’t carry inventory, but for those that do, it can make or break you. Generally, the less inventory you have on hand to support your sales, the better. Inventory only costs money (e.g. insurance, space, interest). In addition to the “hard” costs of carrying inventory, excess inventory keeps you from using that money in other parts of your business. Frankly, there is NO advantage in having inventory.
I’ve heard from business owners that say, “I can’t sell it if it’s not available”, or “we have a better inventory selection, and that is how we’re better than the other guy.” While I understand these arguments, understand, if you can accomplish the same sales with less inventory, you’re going to have better cash flow and better profits!
As discussed previously, the best place to start with a target inventory amount is by industry benchmarking. For many businesses, this is eye opening when they see how different their inventory is compared to others of the same size. Remember, if your competition can do it, so can you!
High Cost: Start with the most expensive items. Look at your historical sales information and projected sales to determine the optimal inventory levels
Low Turnover: Look for items that don’t sell very often or are obsolete. Do you still need to carry these items? Will the vendor give you a credit back for them? Can you scrap them and free up cash?
Low Margin: Be very careful of stocking up on items that you can’t mark up. Many businesses confuse sales with profit. Just because you’re selling a lot doesn’t mean that you’re making a lot of money! Consider discontinuing items where you don’t make much profit.
Lead Time: Having inventory on hand is many times a prerequisite to selling (but not always). With advances in supply chain management, many vendors are happy to provide expedited shipping to earn your business. You may have to negotiate, or even change vendors, but the effort is worth the extra cash.
If you would like a FREE industry comparison for your business, schedule a no-obligation consultation. We promise, no pressure, just information to help increase your cash flow so that you can have a better business, and a less stressful life!