How managing inventory can help with cash flow

Cash flow is the lifeblood of business. Creating cash flow — and, more so, maintaining positive cash flow — relies on a number of factors that can affect your business, including inventory management. The cycle of cash flow revolves around your inventory, and it’s your inventory that can both generate and deplete cash from your business.

You spend the cash you have to buy your supply, then sell that supply to increase your cash. This isn’t an equal parts relationship, because cash and inventory can fluctuate on a daily basis. The balance comes from you and your inventory management.

Employing a smart strategy when it comes to your inventory can help keep your cash flowing and your business growing. Here are a couple of ways to manage inventory and create or maintain a positive cash flow.

Be a smart supplier

Let’s say you sell T-shirts. One month, you buy 100 T-shirts at $5 each and prepare to sell them for $10 each. The problem is that there’s only enough demand to sell 20 T-shirts. You’ve overbought your inventory and now lost $300.

Inventory costs your business, not just to buy but also to store, package and ship, if necessary. As inventory grows, so do these costs. When expenses grow, cash flow trends negative as you begin to spend more than you earn.

This isn’t to say that the opposite is ideal. In fact, contrary to popular belief, being sold out isn’t always a good sign. You may be managing to sell your entire inventory, but the potential business you miss out on hurts your cash flow as well. Let’s revisit the T-shirt example.

Remember, you sell T-shirts for $10. This month, you decide to buy just 10 T-shirts for $5 and quickly sell out. However, there’s enough demand to sell 20 T-shirts. You’ve underbought your inventory and now lost out on a potential $100 more in revenue.

Businesses can’t perfectly predict how much inventory they’ll need every month, quarter or year. Part of good inventory management is having a thorough understanding of your business’s sales and customer base and using both to help determine your supply needs. Knowing when demand goes up can help you determine when to make larger purchase orders or when to mark items at a discount and try to unload some inventory.

Stay on top of orders

Inventory management is more than just buying the right amount of goods. While excess or a lack of inventory can negatively impact your cash flow, so can the other end of the business cycle — sales. Customer dissatisfaction can lead to loss of business, which in turn can reduce your cash flow.

Now, what does customer satisfaction have to do with buying inventory? While traditionally a store without supply wouldn’t be able to sell, many businesses operate online as well. The problem is that online stock doesn’t always represent a business’s actual supply. This oversight can lead to orders being made and possibly processed when, in reality, they can’t be filled. Our trusty T-shirt business is back to help explain.

Your T-shirt business has moved online, and you sell shirts there for $10. Your website doesn’t say how many shirts are in stock, but you know that you have 20 shirts to sell. At the end of the day, you review your sales and realize that customers have ordered a combined 35 shirts. You’ve oversold your inventory and now have two choices:

• Delay some of the orders until you can get more supply
• Cancel some of the orders

Not only has your business lost out on potential sales due to low inventory, but you’ve also risked dissatisfying customers and losing out on their present and future business.

Staying on top of the sales side of your business may seem like an obvious tip, but it’s more than just counting your profits at the end of the week. Orders impact inventory and customer satisfaction — two crucial components that help generate positive cash flow in any business. Creating a system of communication, from the supply side to the sales side of your business, can help mitigate the risk of having orders you aren’t able to fulfill.

Stay positive

It can’t fix every problem, but strong inventory management can help with creating cash flow and keeping your business trending toward growth. Speak with a business banker today to discuss which products can help manage your inventory and your cash flow.