Poor Cashflow: Recognising the Early Signs
Before we can act on cashflow problems, we first need to recognize them. By applying certain calculations to our inventory, we can keep a watchful eye on the early signs of cashflow issues. Once we identify them, we can stop them in the act.
Calculating inventory cashflow
Is your inventory able to meet the demands placed on it by clients? This is something you need to know. The calculation here is simple -just examine this year’s inventory balance alongside last year’s inventory balance. If the balance has decreased, year on year, this represents cash inflow – i.e. you have exchanged inventory items for cash. If there is an increase, this indicates unsold items, and a cash outflow, both of which can lead to problems.
Understand stock turns and Calculate inventory turnover
It is important to understand the number of stock turns you are seeking to achieve as a business. For instance, some retailers focus on 4 turns a year whilst a wholesale distributor may focus on only 2 turns a year.
Inventory turnover is basically the time it takes for you to sell your entire inventory. Use the following calculation.
Inventory turnover = Cost of goods sold / (0.5 x Opening inventory + 0.5 x Closing inventory)
If the result is 4, for example, this means you completely sell out and replenish your inventory four times a year. This number will help you to recognize whether your stock levels are too high or too low so you can adjust accordingly.
How to Reduce Inventory Cashflow Problems
Understand your inventory in real time
Insight and understanding are key elements of modern business, particularly as the business landscape becomes increasingly data-driven and data-oriented. However, it is not enough just to know your inventory and your stock levels. You need to know this information in real time.
This means deploying a solution that gives you up-to-the-second updates on stock levels. This gives you the power to enhance your customer experience and boost the efficiency of your replenishment procedures, while also giving you direct insight into how cashflow is manifesting itself on the warehouse floor.
Emma & Tom’s is a proudly Australian owned business offering healthy minimally processed fruit products. They were experiencing a rapid growth and required to manage multiple inventory locations. Dealing with fresh foods required zero lag in operations and inventory. They made a decision to implement an ERP system that enabled them to effectively manage their inventory. This resulted in a 30% growth year on year growth.
Streamline the supply chain with a ‘Just In Time’ model
Wastage and shrinkage have an enormous effect on cashflow. If your stock is lying around for weeks or months in a warehouse or on a shop floor, this is just increasing the likelihood of shrinkage and reduced profits.
A Just in Time (JIT) supply chain model can help in this regard. Ordering in products or materials at each stage in the process, so they arrive ‘just in time’ to be used and then sold to customers, means that this latency period is eliminated and wastage is greatly reduced. The knock-on effect is improved cashflow at your end.
Pioneered originally by Toyota in the 1960s, JIT inventory control is used for ordering parts when they receive new orders from customers. While JIT supply chain model works well for mid to large enterprise businesses, it may not work for small businesses. Supply-management consultant Johnson argues that small businesses don’t have the purchasing power or the linear demand frequency that is required for adopting JIT model. However, enterprise resource planning software solutions such as SAP Businessone are now becoming popular among small and mid-size businesses. SAP Businessone’s real-time data analytics tools helps business owners get a clear picture of their supply chain at every level. Therefore, simplifying the entire supply chain process and helping businesses adopt a JIT methodology.
Better flexibility with supplier
Your suppliers are business people just like you and so they too understand the difficulties businesses can encounter when it comes to cashflow and inventory management. Aim to develop good relationships with your suppliers and to bring about a situation in which they are happy to work with you to provide the terms you need to get cashflow problems under control.
It may be necessary to renegotiate credit terms with your supplier, giving you more time to pay for any outstanding inventory bills you may have. This, in turn, provides you with additional breathing space when it comes to managing inventory cashflow. However, as mentioned, suppliers are business people too, with their own issues and their own bills to pay. As such, all negotiated terms must be mutually beneficial.
Work with suppliers who deliver on time
Which products are your best sellers? Which products are flying off the shelves and into the hands of customers? Which products are taking longer to shift? Knowing this is key to gaining a firm grasp on the management of your inventory. From here, you can turn your attention toward your suppliers. For example, if a supplier is delaying sending out stock that flies off the shelves and needs to be instantly replenished, this is going to lead to delays, which will in turn harm cashflow. In this case, you should consider working with someone else. On the other hand, if the stock is a slow-burning seller and is difficult to find elsewhere, it may be worth continuing to work with the seller. It all comes down to understanding product demand and your inventory needs.
Provide facilities and incentives for instant payment
We may consider invoice lag to simply be a fact of life. We deliver the goods our clients need, we provide the invoice, we wait. However, this is not always the case – it may be simply that the facility for instant payment is not readily available. No one likes unpaid bills hanging over them. You may find that by making it easy for your customers to pay instantly via credit or debit card significantly reduces your cashflow issues.
You may also decide to offer discount programs and other incentives to encourage this kind of instant payment, although you must make certain that these schemes do not erode your profit margins too greatly.
Some suppliers require a 30-50% upfront payment on ordering. A combination of debt facilities and trade refinance facilities can help small businesses to manage the inventory sales conversion pipeline.
Cashflow is exactly what it sounds like – a flow of cash. It is not always necessary to receive a full payment up front but you do need to ensure that the cash is flowing towards you at a predictable and manageable rate. This can be achieved through factoring.
For example – X Company receives an order for $1,000 of deliverables, which are sold with a 20% discount. They receive $800 up front, and the further $200 is delivered on a payment plan which is carefully managed and monitored. Adherence to the payment plan may result in X company offering a further discount once all cash is recovered, if incentivisation becomes necessary.
Your inventory is not an obstacle which needs to be overcome – it is an asset which helps your business to operate effectively. Understand it, get on top of it, manage it effectively, and start to roll back that all-important inventory cashflow gap.
By Andrew Colliver, CEO of Banjo Loans.
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