10 Cash Flow Strategies for a Successful Business by Scott Richards - HTML preview
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Strategy 5: Manage the stock
Controlling how much stock is on hand can be both an art and a science. Not enough stock will lead to lost revenue. Too much stock can impact on cash flow. I have seen how both can have a major impact on profit and cash flow. For example, a retailer increased the amount of stock on hand and sales increased dramatically when customers saw the availability of products. This is more the exception than the norm. Generally, businesses have too much stock that is tying up valuable resources. One possible reason is that the owner doesn’t want to realise a loss on the sale of the stock. However, they have not considered the hidden costs by holding onto old stock such as missed opportunities due to poor cash flow and shelf space that could be used by a fast moving product. Knowing what the right stock level for your business may require some trial and error. However, with a good accounting program you will be able to make an educated guess about how much stock to carry.Examples of how to improve stock control:§ Monitor stock regularly. Use ratios such as inventory turnover and days inventory to compare to previous periods and industry standards.
§ Clear old and outdated stock by packaging together or discounting.
§ Don’t buy too much stock even if a discount is offered if it will take an extended time to sell.
§ Conversely, for fast moving stock, buy in bulk to receive a discount.
§ Focus on a ‘just in time’ ordering system to save build up of stock.
§ Set minimum and maximum levels of stock and stay within these levels.