How effective inventory management can improve business cash flow
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How effective inventory management can improve business cash flow

Good cash flow management is a vital part of running any business and is key for ensuring you can pay staff salaries on time, meet current expenses, and have capital that will enable you to expand.

The way in which you manage your stock inventory is a crucial part of improving cash flow. If you don’t manage it efficiently, your cash flow may become limited and the impact on your business could be significant.

Considering the difficulties experienced by businesses over the past year, there has been an unprecedented amount of cash flow deficit. However, taking control of your inventory can be a great way to create positive operational cash flow that can help you grow, so to help SME owners and managers, we’ve compiled some insights into effective inventory management.

Important: Before you can fully appreciate the relationship between inventory management and cash flow, it’s important you have a grip on good cash flow management

Inventory management best practice

Making sure you have the processes and systems in place to ensure effective inventory management gives you a great foundation to work from. Here we explore some ways you can streamline your inventory control including:

  • Tracking your supply chain better
  • Implementing good quality control processes
  • Leveraging technology, and considering automated processes

1.     Track supply and demand effectively

A 2018 survey of small businesses discovered that 43% of business leaders either did not track their inventory at all or used inaccurate manual processes to do so, which can lead to a misguided view of stock levels.

Put simply, if you haven’t properly tracked how often your inventory is bought or sold, then you can’t calculate how many products you need to stock.

For example, if your supply is too high, your cash flow can be hit by unnecessary increased expenditure. This also makes the overall cost of goods increase as you are essentially purchasing and storing more inventory than you need to. If the demand for the goods you are selling is not high enough to meet the supply you are buying in, this creates problems for cash flow.

You also need to ensure you are accurately mapping and tracking demand to make the most of every sales opportunity. Not having the right amount of inventory to fulfil orders can have a huge impact on profit margins and overall business growth.

Making sure you track your inventory is therefore vital, and you should make records of the quantities of goods that you bring in. This can help forecast demand and supply for the future, allowing you to take advantage of seasonal peaks or trends.

2.     Implement quality control

Quality control is all about making sure that at every stage of your business your inventory meets the standards expected by the end user.

Manufacturing businesses often spring to mind when it comes to quality control with things like production lines and factory testing. But in reality, quality control processes can be used in all types of businesses, whether they are product-based or service-based, focusing on B2B or B2C markets.

Delivering a consistent product, service and customer experience is fundamental for business growth. If your products or services are poor quality, you’ll ultimately have to invest more time and money repairing, replacing or re-doing things, which will cut into your profit margins.

3.  Invest in technology

Implementing new technology into your business can be simple and there are a huge number of systems now available that are designed to run some of the core processes and will provide in-depth insights that anyone in your business can take advantage of.

Research from Business Org in 2021 listed a whole range of different inventory management tools and software that work for different types of businesses. Here were some of the key findings:

The benefits of good inventory management

Benefit 1: Satisfied customers

Taking a typical scenario for an online or eCommerce business, there is nothing more annoying for a customer than adding something to a checkout basket and get the dreaded ‘Out of Stock’ notification. While this can’t always be avoided, focusing on your inventory management will help to avoid situations such as this and help to build better relationships and advocacy with your customers, which will have a knock-on effect on customer satisfaction and sales.

Benefit 2: Less waste

In contrast to not having enough stock, poor inventory management can also mean having too much stock, leaving you with products or materials you may then be unable to use or sell. Excess stock will mean vital cash is tied up in assets and will impact your company’s cash flow.

Construction companies ordering unnecessary raw materials, tools and other equipment is a good example of what can happen with poor inventory management.

Benefit 3: Increased sales

There’s a direct connection between good inventory management and your company’s sales. If you manage it well, you can maintain and increase your profit margins, but failing to do so can often be a key cause of why some businesses collapse.

If you have dedicated people or teams managing your sales function and inventory management, it’s important to ensure they work closely together and understand how each other operates and the processes that are in place.

Recommended Actions you can take

 Some other steps you could take to help increase sales and profits through inventory management could include:

  • Analysing your historic sales data to predict future trends
  • Looking at any costs that might be associated for things like storage if you have excess stock/goods
  • Calculate which items drive the top 20% of your sales – do you have enough of them at hand?
  • Consider holiday period sales – does your business sell more at certain points of the year like Christmas, the summer holidays, or the end of the tax year?

Top Tip: Understand your inventory turnover – This is a key indicator of how well a business is operating because it reveals the number of times inventory has been sold and replaced during a given time. The formula for inventory turnover is Cost of Goods Sold (COGS) divided by the average value of your inventory.

Find out more about COGS in our guide to gross and net profit.

Your internal inventory management is integral to business growth and increasing profit. Investing in the right tools, staff and technology will be time and money well spent. If you need finance to help you get the right systems in place, a Capify Business Loan could be exactly what you need. For more information, contact our sales team today.