The Complex Connection Between Cashflow and Inventory

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Cashflow and inventory are intricately linked to each other. This is an important concept to understand for inventory managers and business owners alike, as a tell-tale sign of successful business is optimising cashflow and keeping your inventory to a safe minimum. Here we will consider the relationship between cashflow and inventory and how you might control inventory to improve cashflow.

Defining and understanding the relationship

Inventory management is the process by which inventory is kept in control, having just enough to ensure customer orders can be perpetually filled on time with no excess or stockouts. This also happens to be something Unleashed is expert in. The need for this scenario is due to the fact that in essence, every piece of stock you own, is money you have tied up. One way to look at it is to imagine all that stock sitting on your shelves in your storeroom is actually cash sitting on your shelves – unable to be used elsewhere and inhibitive to cashflow.

There are some systemic, money-consuming aspects of excess inventory such as the requirement for more storage space that comes at a premium, the inability to locate items quickly which wastes staff time and the cost of insurance or replacements if an adverse event occurs to the stored inventory.

If cashflow is becoming a problem for your business resulting in the inability to meet bill deadlines or pay staff wages, then it is vital that you look at your inventory situation and consider ways to better get it under control. Ensuring your inventory is not sitting in excess and creating waste but rather can be turned into cash efficiently through a sales and monetisation strategy is vital to improving cashflow.

Practical ways to control inventory for the purpose of improving cashflow

1. Knowledge is key

It is impossible to control and improve your inventory management without accurate, real-time data. To obtain this, you need to utilise inventory management software and systems that are designed to help you track every item of inventory through the warehouse by using things such as barcodes and RFID tags. It can also be accessible via the cloud so that at every manufacturing point (receipt, production, storage, sale), the inventory can be automatically updated (both raw materials and finished products). In addition, analyses of trends and predictions for future requirements can be a breeze with the right software support which will make ordering and purchasing decisions far easier and more accurate.

2. Constantly count and review

Despite having expert software, ‘hands-off’ systems if you like, where it is possible to obtain accurate data from afar, you absolutely cannot discount the value of consistently reviewing your stock through stocktakes. This does not need to be done every week necessarily, however it is vital to ascertain a sensible counting period that can rotate through your different departments so that in an entire, predetermined period of time, every item of your stock has been physically counted and reconciled to your software.

This will also help you keep on top of expiry dates, ensuring all your stock is usable and current and helping you to minimise the amount of stock wastage .

3. Develop your supply chain

It is imperative that you do not underestimate the value of an efficient and reliable supply chain. This is comprised of everything from your suppliers and shipping companies to your manufacturing, marketing and sales. It is the journey from your product as raw material to a finished item in the hands of a customer. And this process must be efficient and lean if you will, to ensure you are not wasting money by ignoring the details.

Every component in your supply chain needs to be well thought out. For example, you should have a validation process for selecting suppliers so that you can formulate an approved list of suppliers offering a reliable and quality service. Additionally, it is imperative you select your shipping companies with the same things in mind as sometimes delays and hold-ups could be avoided if you have a reliable service in place.

There are a few bonuses to doing due diligence in this process. If adverse events occur concerning supply or shipping, with a valued relationship in place, your suppliers and shipping companies are far more likely to go above and beyond for you to ensure continued supply to your customers. Additionally, if they can be certain of your business and your relationship is value-adding for both parties, then you may be able to negotiate bulk deals and loyalty discounts which further increases profit and improves cashflow.

In service and retail, there are so many interconnecting facets such as the relationship between cashflow and inventory that we have described above. It really is vital that you think outside the square and get creative when trying to improve one facet, as it is very likely by optimising something down-stream, you control your variable and improve the whole process.

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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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