Inventory and cashflow have an important relationship with each other. Inventory and cashflow are codependent upon each other. Inventory both consumes cashflow and is directly responsible for generating cashflow. But like anything else, too much or too little of one or the other can be harmful. It’s important to find the right balance.
Inventory and Cashflow
Cashflow is one of the single most important things for a small business owner to keep an eye on. Especially if you don’t have profits to reinvest into the business yet, or you don’t have a reliable source of funding that you can fall back on. It’s really a test for many business owners. If you can’t find the right balance, you’ll end up depleting your cashflow faster than you can replenish it.
The first consideration when thinking about the relationship between inventory and cashflow is avoiding having too much inventory on hand. Similarly, you should avoid keeping too little inventory.
Inventory levels sitting too low will help cashflow in the short run, but will be harmful over time. Not having enough inventory will eventually lead to lost sales or lost opportunities, which is devastating for any business. On the other hand, too much inventory can be just as debilitating. While it does make it easier to fulfill orders, it uses more cash than you actually need to have tied up and it causes unnecessary strain on the business.
Turning over Inventory
Inventory turnover is as important as inventory levels to this discussion. Let’s say that you can turn your inventory over 12 times each year. That would mean that if you have a product sitting on your shelf that costs you $50 and you sell it for $100, you’d be able to earn $50 each month from that shelf-space, or $600 each year.
Now let’s say that you can turn your inventory one more time each year. That’s an extra $50 in gross profit, which may not seem like much, but multiply that by, say, 1000 shelf spots, and all of the sudden that’s $50,000 more profit each year. All without adding any fixed expenses. So the question is, how do you increase your inventory turns? Do to this effectively you have to know which of your items are the most popular and fastest selling, and you’ll have to know which are the more rare sales. Some people stock up on the really popular items and utilize drop-shipping for some of the more slow-moving products.
The last consideration when thinking about the relationship between inventory and cashflow is inventory controls. No matter what kind of software you are using to manage your inventory or how good it is, you will have to manually take stock of your inventory every so often. There’s just no getting around that. It will keep things from disappearing and provide a system of checks and balances to the software that you rely heavily on.