After 12 years working in lending, I’ve had many experiences of a customer needing to urgently increase their overdraft. The cause was nearly always a purchase that left the company unable to make payroll.
In serious cases, we had to restructure their loans because they lost control of their stock, leading to penalty interest and higher lending costs.
It’s a fine balance – too little stock and you risk losing sales. Too much stock means more of everything — space, labour, more cash to outlay, and potentially higher interest costs.
So how do you make sure you don’t get stuck in the same predicament?
Well, instead of seeing stock on your shelves, think of it as money: cold hard cash leaving you out of pocket until it sells.
In short, it’s about buying smart and having a strategy to convert that stock into cash. The faster you move it, the better for your business.
So here are seven ways to help you start finding that spare cash lurking in your stock room:
1. Know what you have … and keep track of it.
You may have the top of the range, bells & whistles inventory system, but if garbage goes in, guess what comes out?
The first step to knowing when you’ll run out of something and need to put aside cash to buy more is easy access to accurate, up-to-date information.
Your decisions will only be as good as the information you have. By ironing out data entry delays and errors, you will get quality information to form your strategy.
And you’ll never triple order something by accident again because someone forgot about returned items or enter in the last stock purchase.
2. Plan your purchasing… and be ready to change those plans
Planning reduces the risk of over purchasing and being forced to sell excess stock at a discount (or worse, disposing it for nothing). There’s also less chance of losing a sale because you’re out of stock.
By buying and holding only what you need, you’ll also save on storage costs because your shelves aren’t filled to the rafters.
You can make an educated guess on what you need to purchase by knowing what you have and what’s been sold in the past (which is why quality information is so important), once you factor in things like:
- What you know about the business – what were sales like same time, last year? What has changed? Has there been growth, or has it declined? Are there guaranteed/contracted sales locked in?
- Seasonality – are you’re prone to rapid increases and decreases? Think about the way we raid stores for fans and air conditioning on the first hot day of the year. You may want to hold extra inventory during the hotter months but reduce it in winter 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) of stock do you need to cover the time it takes to get something back in? Will the buffer level change with seasonality, and across products? Set a warning on your system so you know to order when you reach the minimum.
What works for others may not work for you. A scientific supply company I once encountered suddenly started to increase the amount of their high value, relatively slow-moving stock.
Why? Their new purchasing manager used to work at a large stationery wholesaler, where stock was mostly low value and fast moving.
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.
Prioritise your time when reviewing your stock – in general, 80% of your sales are from 20% of your product lines, so keep a close eye on these items.
Just don’t forget about the slower selling, high-value items – their higher dollar value means any slip up will hit your cash flow hard. Think about whether niche items can be provided on special order only, 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, and you’ll make mistakes. But by regularly reviewing stock levels and sales data, you can quickly adjust your purchasing and par levels to minimise losses caused by mistakes. It allows you to capitalise on new opportunities, and places you in a stronger trading position.
3. Review, Review, Review!
It’s not just purchasing that needs reviewing. You can save much heartache (and money) if you regularly review your physical stock, including:
- Expiry dates: have a system that tracks perishable items (food, medication, cosmetics etc.) so you have enough time to implement volume incentives and discounts to sell items before they have to be thrown out. And if you manage end dates well, you’re less likely to send a customer out-of-date stock by accident.
- Check physical stock: regular spot checks are great for checking your records are correct, and allows you to address issues – theft, damage, data entry errors etc. – more quickly. Think about quality control by checking items are in saleable condition.
- How stock is arranged: place fast selling items placed in easily accessible places (e.g. eye line, waist height, close to loading docks etc.). Consider placing items commonly purchased together close to each other.
By being smart with where items are placed, you’ll draw your customer’s attention to the item and increase the chances of a sale. You’ll also improve staff productivity with less need to constantly locate items.
4. Out with the Old
Look at items that haven’t sold in the last six to 12 months. Consider discontinuing the item and think about strategies to get rid of it.
A high-end shoe retailer I knew loved his stock so much he hated discounting it. His offsite storage unit ended up overfilled, and his high-end store resembled a discount den with the overflow. It was high stacked with shoes that were basically unsaleable because trends had changed.
He ended up having a warehouse sale – what he did sell was well below cost, and he ended up disposing most of it because of the ongoing storage costs.
Cash is king, business is business.
You are far better off converting your stock to cash, 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.
By having an exit plan (and buying smart to begin with), you will be better positioned to sell your stock quickly and maximise the cash you receive.
Whether you use visual merchandising tricks to draw customer’s attention; have social media or print promotions; or use discount and volume incentives, make sure the exit strategy is implemented, and be prepared to adapt it before goods become unsaleable.
5. Everything in its place
Remember our shoe retailer? I once asked about a particular product but staff couldn’t locate because none of the boxes were labelled – a lost sale because of disorganised storage.
By being organised, you won’t lose a sale because you can’t find something, and you’re more likely to catch an error before it becomes a serious problem.
- Start with clear labels with both 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. This reduces the risk of the wrong item being sent out, saving you the cost of dealing with a return and keep your credibility and reputation intact.
- Sell older stock first – new stock received should be placed 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 finite shelf life, but it’s also a good way to manage everything else – by selling older stock first, you reduce the risk of any deterioration or damage which may happen while it’s in your storeroom.
Sometimes suppliers redesign their packaging or tweak their products – although the items are still fundamentally the same, the customer may perceive these older items as obsolete or less desirable.
By being organised, your customer’s experience will improve with faster fulfilment and fewer returns, which will only enhance your brand’s reputation.
6. Manage Supplier Relationships
Developing a strong working relationship with your suppliers can be worth its weight in gold. You rely on them, as they rely on you.
Collaboration allows your supplier to 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 also be more open to helping if you hit a rough patch e.g. when something needs to be restocked urgently or when a slow-selling item needs to be returned.
I’ve had clients whose suppliers have offered to house their stock overflow during a seasonal peak (saving additional warehousing expense), or extend more favourable payment terms when cash flow’s been tight.
You’ll also be better positioned to negotiate discounts, better payment terms, and lower minimum quantities. Could items be sent to the customer straight from the supplier? Are there items that can be sold on consignment?
You don’t know unless you ask … and what you have to gain are cost savings, longer to pay your bills, and the opportunity to reduce the amount of stock you need purchase in advance.
7. Call in an Expert
Sometimes a fresh set of eyes is all you need. It could be a one-off review with recommendations, or a specialist setting up a system for you. You could even outsource it completely.
Whatever you choose, it takes special skills to apply the principles of inventory management to the environment you’re in.
By taking some of the steps outlined here – like knowing your business and customer’s buying patterns, being organised, purchasing smart, and having an orderly strategy for selling your product – you’ll find yourself being able to adapt to changing trading conditions, and you won’t sink more cash than you need to. Your bottom line will thank you for it.
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About the Author
After spending over a decade in banking and finance working as a lending and risk specialist, Amy has extensive experience working with countless companies – from small businesses to large corporations, across many industries, both domestically and abroad. Working as a business coach and mentor, Amy takes a practical approach and enjoys using her commercial experience to help small businesses thrive.