During my time in commercial lending, I’d get a call every week from a panicked customer needing an urgent overdraft increase because there wasn’t enough cash to make payroll. That stress was usually caused by large purchases that left them short: in serious cases, loans had to be restructured, resulting in penalty interest and higher borrowing costs.
So how does changing the way you manage stock give you more cash?
Start by seeing your shelves and stock room piled high with cash, because that’s exactly what you forked over when you paid for the goods. And that money won’t come back until you sell it: five hundred bottles of moisturiser won’t pay your rent or tax.
It’s about buying smart and having a strategy to monetise your stock because the faster you move it, the better for your business and bottom line. But there’s a fine balance: too little stock can mean lost sales because you’re out of something. Too much means more of everything: space, labour, cash to outlay and potentially higher interest costs.
Know what you’ve got
Easy access to real time stock levels is the first step to knowing if you’ll run out of something and when to put cash aside to pay for it.
Your purchasing decisions will only be as good as the information you have, so ironing out potential data entry delays and mistakes means you’ll get quality, accurate, up-to-date information to form your strategy. As SAP Americas Vice President Michael Wohlwend believes, “The quicker you have the information the more valuable and pertinent your decisions are going to be—and the more agile and flexible your company will be”.
Plan your purchasing … and be ready to change your plans
By knowing what you have and what’s been sold in the past (making quality information even more important), you can make an educated guess on how much you’ll need once you factor in things like:
- What were sales like same time, last year? What’s changed? Has there been growth or has it declined? Are there guaranteed/contracted sales locked in?
- Consider seasonality: are you’re prone to rapid increases and decreases? Think about the way we raid stores for air conditioners on the first hot day of the year: increase inventory during the hotter months, but reduce it when no one wants a new fan.
- Is there a plan B in place in case a supplier runs out of your most critical items?
- How much buffer (or par level) stock do you need to cover the time it takes to get something back in? Set a warning on your system so you know to order when you reach the minimum.
- Will the buffer level change with seasonality? Will it vary between product types?
What works for others may not work for you. One scientific supply company I worked with suddenly increased their high value, slow-moving stock because their new purchasing manager previously worked at a large stationery distributor specialising in low value and fast-moving items.
By not adjusting their purchasing behaviour to suit the business, the company’s cash flow was decimated. Interest costs went through the roof, and it took over two years to sell the stock down.
Generally, 80% of your sales are from 20% of your product lines, so prioritise your time but don’t forget the slow-selling, high-value items: their higher dollar value means any slip up will hit your cash flow hard. Can niche items can be provided on special order so you don’t need to hold them at all?
It takes trial and error and extraordinary events can throw out the best-laid plans. Trading conditions change. Mistakes will be made. But regular reviews of stock levels and sales means you can quickly adjust your purchasing and par levels to minimise loss. It also allows you to capitalise on new opportunities, placing your business in a stronger trading position.
You’re also less likely to accidently triple order or over-purchase and you reduce the risk of being forced to sell excess stock at a discount. Or worse, disposing of it for nothing.
Review, review, review!
Regular physical stock checks could save you loads of heartache and cash: it’s a great way to quickly identify whether your records are correct and address issues such as theft, damage and data entry errors before they become chronic problems. It’s also an opportunity to review things such as:
- Expiry dates: reduce potential losses on items such as food, medication, cosmetics etc., by seeing whether your system can track the expiry dates for batches of perishable items. This gives you ample time to give volume discounts to sell it before it needs to be thrown out. And if you manage end dates well, you’re less likely to accidently send customers out-of-date stock.
- How stock is arranged: Arrange perishable items so the oldest stock is the first to leave and place fast selling items placed in easily accessible places (eye line, waist height, close to loading docks etc.). Consider placing items commonly purchased together close to each other to improve productivity with less need to constantly locate items.
By being smart with arranging your stock, you’ll increase the chances of a sale by drawing your customer’s attention to the item and make your staff more efficient. And regular quality checks on the saleability of your items means there will be less loss due to damage.
Out with the old
A high-end retailer I knew loved his stock so much that discounting was minimal during the season. His offsite storage unit ended up overfilled and the overflow made his fancy store resemble a discount den stacked high with seasonal stock that was basically unsaleable because trends had changed. The stock that was sold at his closing down sale was below cost, and he had to dispose of more than half of it.
Cash is king and there is no space business for emotional attachment. You’re better off monetising your stock no matter how much you love it. If you don’t, it will take up precious real estate in your storeroom and cost you even more money.
Discontinue items that haven’t sold in the last six to twelve months and put strategies in place to get rid of what’s left. A well thought out exit plan allows you to sell stock quickly and maximise the cash you get back.
Whether you use visual merchandising tricks, promotions, discounts and volume incentives, make sure you implement your exit strategy and adapt it before goods become unsaleable.
Everything in its place
Remember our high-end retailer? I once asked about a particular product that his staff couldn’t locate because none of the boxes were labelled. By being organised, not only will you minimise lost sales because you can’t find something, you’re more likely to catch an error before it becomes a serious problem.
Your customer’s experience will improve with faster fulfilment and fewer returns, which will only enhance your brand’s reputation. As President of Far-Aun Quest, Francis Matthew Auriemma, puts it, “Disorganization can cause stock to get backed up or even lost …. If everything is in its proper place, you’ll know when something is missing … Employees will be able to cause stock to flow fluidly, and resources will be freed up for additional tasks.”
Simple tricks include:
- Label clearly boxes with item name and quantity. If you’re stocking shirts, write “12 shirts, size M”. Staff won’t waste time rummaging for stock and you won’t get caught short if a carton is only half full.
- Keep similar looking items apart and label them clearly: the risk of sending out the wrong item is reduced; you save the cost of dealing with returns and keep your reputation intact.
- Sell older stock first and place newer stock straight to the back so older stock is more accessible and pushed straight to the front.
The first in, first out principle is important for goods with a limited shelf life, but it’s also a good way to manage everything else. Selling older stock first reduces the risk of any deterioration and damage which may happen while it’s in your storeroom. And when suppliers redesign packaging, customer see these older items as obsolete or less desirable even though the product is fundamentally still the same.
Collaborate with suppliers
Developing a strong relationship with your suppliers can be worth its weight in gold: you rely on them as they rely on you. Collaboration means they can increase production in advance to cater for your peak requirements, and constant communication allows them to slow down production if you suddenly experience delays.
They’ll be more open to helping out if you hit a rough patch e.g. when something needs to be restocked urgently or when slow-selling items need returning. I’ve had clients whose suppliers have housed excess stock during peak seasons (saving additional warehousing expense) and extended favourable payment terms during tight times.
You’ll also be better positioned to negotiate discounts, longer payment terms and lower minimum quantities. Could items be sent to the customer straight from the supplier? Could there be things sold on consignment?
You don’t know unless you ask: all you have to gain are cost savings, more time to pay your bills and the chance to reduce the amount of stock you need purchase in advance.
Call an expert
Sometimes a fresh set of eyes is all you need: it could be a one-off review or a specialist setting up a system for you. You could even outsource it completely, as long as the principles of inventory management are applied to your specific environment.
By knowing your customers, buying smart, keeping good records, staying organised, tracking buying trends and adapting to trading conditions, you won’t sink more cash than you need to. And your bottom line will thank you for it.
You can help us (and help yourself)
Small and medium businesses and startups have never needed credible, independent journalism and information more than now.
That’s our job at SmartCompany: to keep you informed with the news, interviews and analysis you need to manage your way through this unprecedented crisis.
Now, there’s a way you can help us keep doing this: by becoming a SmartCompany supporter.
Even a small contribution will help us to keep doing the journalism that keeps Australia’s entrepreneurs informed.