Where Your Cash Is Hiding – Small Business Inventory Management

Just because you have sales does not mean you have cash.

Inventory Managemet

Running a small business means managing many things, but few things are more important than managing your cash flow. I found this out first hand when working with Bear Coast Coffee. There may be many different places cash might be hiding, but the first place to look is in inventory.

Inventory Management

Inventory management is how a company orders, stores, and uses inventory.  It can take so many different forms depending on a business’s need. For large companies there are large bar code systems, forklifts, and dedicated warehouse employees. While other companies use Tupperware next to a pack and play in the guest bedroom. Whatever inventory management means to you, inventory is where you look to help your cash-flow.

Inventory Basics

Inventory costs money. Yeah I know this is a shocker, but you need to spend money to purchase inventory. Once purchased, inventory converts into piggy banks that hold your money on a shelf in your warehouse (or guest bedroom) until you customer buys it and releases the cash.

The Three Stages of Inventory

  1. From Cash
  2. To Inventory
  3. To Cash again

The Goal with Inventory

The goal is to keep only the inventory you need to meet customer demands, and convert inventory back into cash as quickly as possible.

The official business term for this process is called throughput. There is a great book that covers this topic is detail called The Goal by Eliyahu M. Goldratt.

Help With Cash Flow

If you you don’t have cash and your customers are happy, then you’re holding more inventory than you need.  Ironically, this happens all the time in small businesses because of discounts.

One of the most common mistakes a small business makes is buying bulk for the sake of discounts.

Have you ever had someone upsell you on more than you need because it will save you money? Yeah that sort of makes sense, and no, you’re they’re not lying to you. In many ways you are saving money. But by doing this, you end up having more inventory than you need and it dramatically increases how long it takes for you to convert the inventory back into cash.

Three Tactics To Help Your Cash Flow

1. Reduce the size and increase the frequency of your inventory purchases.

This is the first and most powerful tip. When working with businesses, this is almost all they need to do to get their cash back on track.  If you know how long it takes for your inventory to arrive you can use the same tactics discussed in my post about Production Management to know how much and when to reorder inventory.

2. Offer a pre-sale.

A pre-sale is when you sell the product before you buy or produce the inventory. This flips the three stages of inventory on their head. You get the cash from your customer before you even purchase the inventory. This does not work for every item, but can be used for special releases.

3. Negotiate terms with suppliers.

Arrange to pay your established vendors a few weeks after days after you buy the inventory.  Many vendors, especially ones you use often, are likely to give you 15-30 days to pay your invoice, but you have to ask. This could then mean that by the time you pay for your inventory you are selling that inventory to a customer and the time your cash exists as inventory could be only a day or two.

Cash-flow is one of the least talked about and most difficult parts of running a product based business. However, if you keep your eye on the goal and increase throughput, you will be able to dramatically help how good your bank account looks.

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