Four Strategies For Managing Business Inventory
In 2013, Walmart lost $3 billion due to poor inventory management and suffered frequent out of stock instances. Poor inventory management affects large businesses (like Walmart) and small ones alike. It is important to recognise the impact this could have on your bottom line and future growth.
So what can you do to prevent the same catastrophe happening to your business?
1. Make sure you hold as much stock than you need
While debt finance has been accessible and rates low in recent years, many businesses have been lulled into a false sense of security that they can take advantage of a “good deal” and save money by “bulk buying”. However, this kind of buying leads to disaster as your free cash flow dries up and interest rates start to rise.
Holding more stock than is needed is never a good idea. Excess stock is dead money and takes up space, potentially leading to higher rent costs. Excess stock also locks up your cash flow. As interest rates increase excess stock can become expensive to maintain.
No doubt you’ve heard of lean manufacturing and “just in time” ordering in the manufacturing environment. Lean manufacturing originated in the Japanese manufacturing industry to minimise waste. The aim is to have just enough stock for the production cycle at any point in time. This keeps cash requirements for maintaining stock levels low. Lean manufacturing may not always be as easily applied in other environments, such as stock imports or orders requiring a long lead time suppliers. However, wherever possible it you should think about applying it to your business.
Advisers and accountants often talk about your “stock turnover” in terms of your business operating cycle. Stock turnover is the number of times in a year your inventory is completely turned over. If say, your cost of goods sold is $300,000 and you hold $100,000 in stock, your turn rate is 3 times. From a business management perspective the higher the rate of stock turnover, the lower the amount that you have invested in inventories and the lower the risks for your business.
Business Queensland provides a handy stock turnover calculator to assist small businesses.
You will need to consider your buying patterns. You obviously need to have enough stock to meet customer demand. However, where possible, think about ways to order less inventory more frequently.
Although volume discounts and shipping costs can mean the price per unit may increase for smaller orders, take the time to compare this to the cost of holding a greater quantity of stock for longer than needed. There is the financing cost, warehouse storage space (rent costs), and opportunity cost – loss of ability to use your money elsewhere if it wasn’t tied up in stock.
An understanding of your sales patterns (that is, which items customers are buying, when and how often) is essential to inventory management. Consider using systems to track and analyse this data to assist with inventory management.
2. Better accessibility and visibility to your inventory
Make sure your stock is stored in an orderly manner and is accessible and visible when you need it. You don’t want to be in a situation where your inventory management system indicates you have items in stock but you can’t find them for your customers. You can’t sell stock you don’t know you have. Good organisation of your storage area will keep things in plain sight and at hand when needed.
Consider investing in good inventory tracking software or add-ons to your accounting system. This will help streamline your stocktake and help maintain up to date information about your stock holdings. There are many different stock management applications that can integrate to your point of sales and inventory management systems. Some of these are tailored to your industry and save even more time with establishment. IMT Accountants & Advisors provide business coaching services to help you select the best option for you and your business.
The high profile collapse of Dick Smith is a good example of poor stock arrangement. Dick Smith is reported to have held up to 12 years’ worth of batteries. Proper use of inventory management systems to track sales trends would have avoided situations like this.
3. Maximise the credits offered by suppliers
Supplier terms of trade are an important part of your buying strategy. Occasionally, suppliers offer generous credit terms that can serve as a low cost tool in funding your inventory.
As we transition towards a digital marketplace and eCommerce, small businesses might also find it easier to purchase goods direct online. This will generally mean that payment is required at the time of ordering (removing any benefits from extended payment terms). However, you may be able to source a better per unit price this way, provided you have the free cash flow to fund the purchases.
The traditional approach is to negotiate suitable trading terms with your “bricks and mortar” supplier. Matching your stock orders to the payment terms offered will help you maximise your cash flow. For example, if your suppliers offer 30 day terms, consider ordering only enough stock to cover 30 days sales.
Where possible, look at negotiating terms based on a set number of days “end of month”. This means stock will be payable a set number of days into the following month, irrespective of when it was ordered during the current month. Consider ordering inventory earlier in the month to maximise the number of days you have available to sell the goods before having to pay for them.
4. Take action before the “best before” date
Consider the saleable life of the product. Is there a risk that it will become obsolete or spoiled before you can sell it? Does it have any “use by” or “best before” date considerations. The more stock you hold the higher the risk that you may have to dispose of it before you can sell it.
Slow moving stock poses a problem for many business owners. While we all want to maximise the profit margin on our stock purchases, it is important to be proactive and discount the stock when it appears some items are moving slower than expected or that the market has moved onto a newer or different item.
A good understanding of your stock turnover and stock requirements will help you keep more free cash and clear out your storage areas. On the other hand, failing to implement thought out and proactive inventory management strategies is likely to cost you a lot more than you may realise.
Key takeaways
IMT Accountants & Advisors provide inventory management services for business clients. To see the list of services we provide visit: Our Services