Cashflow and inventory go hand in hand when it comes to managing your business. Inventory can either help a business with cashflow or be a bit of a hindrance. How you manage your inventory will directly impact the movement and availability of your cash. Your accounting method plays a big role in how your cashflow looks after managing your inventory costs. This might not be something you would put together but it’s definitely important and the impacts can make a big difference to your inventory control and your cashflow.
Which accounting method to use?
When looking at your inventory costs, you’ll see a direct correlation to your cashflow depending on which accounting method you use.
As an Unleashed user, you’ll be using the weighted average cost method.
Finding the optimum inventory level for your cashflow
When you are aiming to optimise your inventory control and cashflow, you’ll need to pay attention to stock levels. Inventory levels fluctuate every day and are directly affected by current sales.
If you’re keeping more inventory than current demand, it can greatly impact your cashflow. When more cash is tied up in your excess inventory, you won’t be able to move that cash around freely. It is not liquid and you need to sell the inventory off before you realise that cash again. This means you have less cash stored in the bank. Instead, your inventory is viewed as a non-cash asset.
It’s a strategic move to find the optimum level for inventory control to operate a successful business. When you have a balanced, healthy amount of inventory in your warehouse, you’ll be able to control more of your cashflow outside of this asset.
Analyse whether bulk buying is right for you
Bulk buying can be a practical option for many businesses because buying at a wholesale price is generally more attractive and affordable. Initially, this may seem like a viable solution to save money and keep cashflow going. However, the perks are all subject to change if the bulk order is too large and you’re having trouble selling it off.
Excess inventory that sits on the warehouse shelves for long periods of time ties up cash. All of a sudden your cashflow has diminished and your inventory has put you at risk. If you are struggling to turn your excess inventory into sales, then cash needed for other parts of the business may experience a negative domino effect. All of a sudden your advertising budget or operational expenses might feel the pinch and your R&D team are lacking funds to continue their work. It’s important to have confidence in your bulk order and inventory control to keep your cashflow moving.
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.