It is imperative to understand that cashflow and profit are two different things. While you evaluate your cashflow you may encounter situations where you have made a profit, but you are lacking in working capital. Low working capital means that your current liabilities exceed your current assets in this case the company may have outstanding bills to pay.
However, having too high working capital is also not a good sign as it indicates that too much cash is tied with your current assets and the company may have unsold and unused inventories or receivables, which is clearly an ineffective way of utilising precious company resources.
A working capital ratio is calculated by dividing current assets by current liabilities. Working capital ratios of 1.2 to 2.0 are considered desirable, but a ratio higher than 2.0 may indicate that the company is not making the most effective use of its assets to increase revenues. So rather than maximising the cashflow, the company should focus on optimising it.
There are numerous approaches to optimising the operational cashflow of your business. One proven method to a healthy cashflow is staying organised with inventory management. Boosting your cashflow with inventory management comes down to planning ahead through using better inventory management methods. Establishing systems and habits for tracking your inventory stock flow allows you to predict the flow of your cash and avoid future mistakes that could hurt your cashflow. Below we provide 10 useful tips to help you optimise cashflow using inventory management.
Invest in an inventory management system
Inventory management systems like Unleashed Software offer solutions that cater for your business needs. If you are unaware of what inventory stock you have on hand, it will be difficult to have an accurate insight into what to order and what is not selling.
Revisit your levels of safety stock
If you maintain safety stock, it is important to actually analyse whether or not you use it, how often you use it, and the benefits and costs of the levels you keep. You may be able to reduce the amount you keep in safety stock, and this can be aided by better inventory management solutions.
Stop making or buying items that don’t sell
It can often be hard to let go of some items, but if this inventory stock really isn’t moving, it is a waste of cash, costing your business money and making you less profitable. Consider how you can get rid of excess stock.
Implement internal controls
It is important to have internal controls on how inventory stock is handled to help avoid inventory shrinkage, such as damage due to employee carelessness or a least pleasant problem of losing inventory items to employee theft. Also note, that employee theft of inventory items also happens at receiving shipments.
Break down and report your inventory into three categories
Categorising your inventory into these three categories of safety stock, replenish stock, obsolete stock will help you stay organised. Analysing inventory stock this way helps you make smarter purchasing decisions.
Develop a company policy to deal with dead stock
It is critical to identify and liquidate dead stock such as obsolete stock that you can no longer sell in your typical business settings. Decide on strategies that will help you move dead stock and then execute the action inventory items every month or every quarter – whichever makes sense to your business.
Reconsider bulk purchase discounts
You may be getting your inventory stock at a discount, but you may be purchasing too much of any one item. If you are struggling with cashflow, bulk purchasing is not the best fix. Take advantage of bulk discounts once you get your cashflow under control.
Pay attention to your supplier accounts
If you let your supplier order and stock inventory for you, ensure you have a system in place to closely monitor their actions.
If dropshipping works for your business model, consider using dropshipping to optimise cashflow.
Try financing your inventory
If financing your inventory works for your business in order to free up cashflow, then consider the cost-benefit analysis of this. However, ensure you implement a system that immediately pays off the debt when inventory is sold. For example, if you financed $10,000 worth of inventory and sold $3,000 of it in the first week, pay off that $3,000 in a timely manner so the principle is decreasing.
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.