As a business owner, any improvements you make in Cash Flow Management are going to be based on three factors – Accounts Receivable, Accounts Payable or Inventory. Family owned small businesses are more affected by changes in cash flow than larger organizations, because of a smaller cash cushion. Cash Flow Forecasting done by an in-house CFO or CFO for hire will take into account these factors.
What are the ways that you can better manage your Inventory to improve Cash Flow? If you sell or make products, inventory is a major asset and use of cash for your company. Here are five ways you can manage your inventory differently and increase the available cash in your business.
- Increase your inventory turns – Profits come from the exchange of money. Inventory that is sitting idle is not making money. Increasing sales increases inventory turns, but with level sales, reducing your inventory will increase your turns as well, and free cash to be used elsewhere, helping your bottom line.
- Eliminate obsolete inventory – Inventory you can’t sell is a boat anchor to your earnings. You are better off with $1,000 in available cash than having $10,000 in inventory that you can’t sell. Obsolete inventory is a drain on your cash, company resources, and warehouse space.
- Change your reorder point – How fast can your supplier restock you? How fast can you manufacture product to deliver to your customer? The lower your reorder point, the less inventory you have sitting idle on the floor. Track this to assure that you don’t lose sales because you’re out of stock.
- Reduce your minimum order quantity – Rather than ordering 1,000 pieces from your supplier, order 500 or maybe even 250. The smaller that restocking order, the less cash you are committing at any one time for inventory, and the more you have for other uses.
- Use bulk purchasing with incremental releases – If you reduce your order quantity, your pricing might go up. But if you commit to a larger order by issuing a Bulk PO, you could keep that lower price. By shipping releases against that PO, you limit your incremental cash outlay.
There are many factors affecting Cash Flow in a business. The plan you use to manage your inventory can have a dramatic effect on how much money you have available for other things.