How Does Inventory Management Affect Cashflow?

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Good cashflow is key to the success of every business. Bad cashflow can have seriously negative effects on the overall productivity of the business, including a negative impact on the businesses bottom line.

Growing businesses may not realise that good inventory management can actually be make-or-break for the quality of a company’s cashflow. In this article, we explain the relationship between inventory management and cashflow, and how inventory managers can improve the cashflow in a few easy steps.

What is cashflow?

Cashflow is what keeps the business operating as normal – it is having the right amount of funds available to pay for all the costs involved in running a business. Good cashflow will see the business prosper, as it is easily able to pay its employees, contractors and vendors on time, to pay for the machinery and equipment required to manufacture products, and to pay for ongoing costs like electricity and other bills.

When a business has bad cashflow, then, it will not be able to easily continue operating – it may need to take out loans in order to continue to function as per usual. This is bad for all involved, and it is a very slippery slope for business owners.

How inventory management can improve cashflow

One common reason why businesses end up with bad cashflow is poor inventory management. Inadequately managed inventory can leave a business cash poor and unable to operate as usual.

For example, poor inventory management can lead to over-ordering stock which ends up obsolete or being in excess of actual customer demand. This essentially means that the businesses cash is tied up in unsellable stock.

One way inventory managers can avoid this situation is by investing in inventory software. This software can help managers track previous sales patterns and consider which products will be in demand — or not — in the near future. when it comes to order time, managers can make informed and accurate inventory decisions.

In a similar way, poor inventory management can lead to under-ordering of stock. This happens when demand has not been adequately predicted, leaving the business short of popular, sellable items. This is wasted sales opportunities and means business owners will need to find other ways to make sales.

Good inventory management requires careful consideration of anticipated sales trends in future. By downloading inventory software, inventory managers can answer questions like what items were popular this time last year? How many did we sell? Did we have enough, or too much?

In the case where a business does end up with excess stock, a good inventory manager will employ strategies to get rid of excess inventory stock in order to offset the cost of purchasing and storing them.

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Melanie - Unleashed Software

Article by Melanie Chan in collaboration with our team of Unleashed Software inventory and business specialists. Melanie has been writing about inventory management for the past three years. When not writing about inventory management, you can find her eating her way through Auckland.

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