Last time we talked about improving cash flow by controlling accounts receivable so this week we will tackle inventory control.
The goal with inventory management is to maintain a sufficient supply of inventory to satisfy customer demand without tying up company cash flow by needlessly storing excess product. This can only be done effectively by tracking metrics such as on-time delivery rates for your vendors/suppliers and inventory turnover rates. Businesses should be aware of how fast products are being sold and how reliable their suppliers are. The more reliable the supplier, the less excess inventory you need to have on hand as you can be comfortable that the product will arrive when you need it.
Another facet of inventory management is determining the proper number and composition of your inventory. You want enough product on the shelves to be interesting to customers, but not so much that is overwhelms them. You also don’t want your cash flow tied up in merchandise that isn’t selling so you need to track inventory turnover rates to determine what is selling and what is not. Consider discounting the slow moving items regularly to get them off your shelves and the money into your bank.
Maintaining good relationships with your suppliers is an additional way to improve inventory management. You want to insure that you have the lowest lead times, smallest minimum order quantities and largest volume discounts you can get. Don’t be afraid to negotiate for this things! Consider implementing a supplier managed inventory program or try to get consignment stocking (supplier owns the inventory and stores it at your business). Not all suppliers are capable or willing to participate in programs like this, but you don’t know if you don’t ask.
Remember that every dollar of inventory sitting on a shelf is a dollar not available for spending on payroll, owner draws or advertising, etc.! Next time, we will talk about accounts payable and their impact on cash flow.