This is Part 3 of 5 posts on how to get the most cash flow out of your business. The focus of Part 3 is Inventory Management.
Anytime you make a purchase, you are tying down your cash. The key is to manage how long that cash is tied down for. For example, inventory purchases should be made with a close eye on how quickly those goods can be turned into cash generating revenue. You don't want your inventory to be sitting around in your warehouse for too long waiting to be sold. But at the same time, you want to have enough inventory on hand to satisfy customer demands in a timely way. It's a balancing act for sure, and a delicate one at that.
When evaluating any purchase, the question should be "How long before I see an ROI from this investment?" There are many ways to impact cash flow through management of inventory. Below are my favorites and the ones I think are key:
- 1) Employ a Just-In-Time Inventory Strategy – A Just in time (JIT) inventory strategy increases efficiency and decreases waste by receiving goods only as they are needed in the production process, thereby reducing inventory costs and increasing turnover and freeing up cash. Obviously, this requires the ability to accurately forecast demand. The benefits include reduced inventory levels and increased turnover, reduced purchasing lead time and safety stocks, increased scheduling flexibility, lower investment in factory and warehouse space, reduced obsolescence, reduced scrap and rework, and reduced operating expense. As long as you have reliable suppliers, can accurately forecast your demand, and have a good handle on your inventory levels at all times, this is a great way to maximize cash flow if your business carries inventory.
2) Pay for what you get, not the other way around – When goods are received into your warehouse, they should be carefully scrutinized prior to acceptance. Is the merchandise in good condition? Did you receive the quantity and type of goods you ordered? Too many times companies skip these important steps and end up paying for goods they didn't receive, didn't order, or are otherwise unusable. The 3-way-match is oh-so-important when it comes to purchasing inventory, as discussed in Part 2 of this series, which can be found here: https://www.linkedin.com/pulse/5-ways-maximize-cash-flow-part-2-payables-process-shirley?trk=pulse_spock-articles.
3) Get Rid of It – Turn stale or slow moving inventory into cash by discounting to move quickly, having a warehouse sale or returning the inventory to the vendor. Simply writing down impaired inventory can save cash even if it is not sold because a book loss is created that will reduce income taxes now or in the future.
4) Set Limits – Get control over who in your organization is authorized to make purchases on your behalf and how much they can spend. Without that, your employees could create obligations for your company beyond its means. If you don't want to pay for goods and services you don't need or want, make sure you keep tight controls over spending authorization.
What other solutions do you have to maximize cash flow through inventory management? Please share! I learn as much from you as you do from me, so please add to this article in the comments below.
Stay Tuned for Post #4 on Financing and Fees!