In the second of our three part series, Sage Business Expert, Mark Barrett, explains how tying money up in stock can seriously damage your cash flow and how you can overcome it.
Stock control is a vital issue that tends to be overlooked and feels like a juggling act. Too much can place a heavy toll on your cash outflow but too little can result in lost sales, reducing your cash inflow.
The key is to know how quickly your stock is moving and how long each item of stock is on the shelves before being sold, giving you an average stock-holding period.
Many manufacturers operate a just-in-time (JIT) stock control system, where all the components required for assembly on a particular day arrive at the factory early that morning. This helps to minimise manufacturing costs as JIT stock takes up little space, minimises stock-holding and virtually eliminates the risks of obsolete or damaged stock. Because JIT manufacturers hold stock for a very short time, they are able to conserve substantial cash.
JIT is a good model to strive for as it embraces all the principles of good stock management, but is impractical to fully adopt for small businesses, so how do you achieve the important aspects of this system?
Firstly, identify the fast and slow moving stock items with the aim of establishing optimum stock levels for each, thereby minimising the cash tied up in stock. Things to be considered when deciding optimum stock levels include:
- Projected sales of each product?
- How available are the items to purchase from suppliers?
- How long does it take for suppliers to deliver?
- Think about removing slow movers from your product range?
Remember that the longer stock sits on your shelves, the longer it ties up your money which is not working for you. Try the following for better stock control:
- Know the stock turnaround for all major items of stock.
- Apply good controls to the significant items and simplify controls for the less significant items.
- Sell off outdated or slow moving stock; it will only get more difficult to sell the longer you keep it!
- Consider having part of your product or process outsourced rather than take it upon yourself e.g. Print on demand books rather than hold large numbers of books taking up space, this also makes it easier to update with latest editions and avoid the situation where you have boxes of obsolete stock.
The vital question
What is your business cash doing? If it’s tied up in stock, then it’s not really working for your business if it just sits on the shelf.
The cash simply won’t be available if it’s needed elsewhere in the business, like paying your VAT.
If you have valuable cash tied up in stock, here are some ideas for getting it to work for you.
What are you really paying?
There’s an incentive to buy in bulk in order to pay lower prices. On the face of it, it sounds like a good idea. However, when you count the real cost, it might surprise you. If you buy more stock than you need, you’ll have to store the excess and you’ll need to insure it. If you paid for the stock with an overdraft, credit card or loan, when you add the interest you’re paying to the cost, it increases the price and the cheap deal may start to look a lot less attractive.
Try only buying what you can turn over in a short space of time. This works well to minimise the amount of cash you have tied up in stock. However, you’ll be receiving more deliveries for the same amount of stock, so your handling and administration costs will go up. If your supplier can’t deliver on time, you could lose customers.
Don’t become obsolete
Obsolete and slow moving stock is an absolute cash flow killer for any business. Knowing what sells and clearing out slow movers will help you avoid this situation.
Sell slow stock now at a discount to avoid being left with dead stock. Spend the money on fast moving stock that will generate more profitable flows of cash to compensate for the discounts. Good stock management doesn’t just happen, it has to be planned and worked at.
Learn to control stock effectively:
- You might think at first that the most expensive items in your stock should receive the most attention.
- But in reality, items with higher turnovers irrespective of value have a greater effect on your business.
- If you focus too much on the high value items while ignoring the rest of your stock, you run the risk of running out of the lower-priced products that actually contribute more to your bottom line.
Often, a large percent of a company’s revenues come from a small percent of the products. Companies that respect this concentrate their efforts on the key items.
- If you sell 1,000 low cost items to every one high value item, then don’t hold large stocks of the high value items, but match the stock holding to the sales levels.
- Divide your stock into groups A, B and C depending on the cash impact they have on your business.
- You can then stock more of the vital A items while keeping the B and C items at more manageable levels.
- This is known as the ABC approach.
But remember stock management is about having the right level of stock to satisfy your customers, and identifying excess or old stock. It is not just about keeping low levels of stock. Efficient stock control will save you money.
Tools to help you manage your stock
One of the easiest ways to understand what’s happening with your stock is to use software. Sage 50 Accounts has an excellent stock control system built-in with a host of reports to give you detailed insight into an area of your business you maybe not of appreciated before.
Click here for part one of the cash flow mini series on how you can use VAT to effectively manage your cash flow. Look out for part 3 coming soon …
This blog post is not meant as a substitute for advice on particular issues and is written in general terms. You should seek specific advice before taking any action based on information that this post contains.