Is Your Business Short on Cash in This Economy?

In a world where inventory prices are increasing and accounts receivable tend to drag on just a little too long, what is a business to do? Look at your inventory.

When I ask a business owner “What is the value of your inventory?” I almost always hear the cost of the product. When I then ask, “How many weeks of supply is that?” I most often hear silence. These are often the same businesses with cash flow problems.

In order to effectively manage your inventory, you need to know what you expect to sell. Then, based on your sales forecasts, you plan to have ample inventory on hand to cover the expected sales until the next shipment arrives, plus a safety stock to cover any unexpected increase in sales. Buying inventory in excess of this creates a cash gap problem.

The cash gap problem occurs because you pay for the inventory before you sell it. Then the time the inventory is sitting in the warehouse, it is being financed on a line of credit. Even if favorable pricing was obtained on a large order, the additional finance costs and possible write-offs of obsolete items tend to offset any savings on the purchase price.

So what can you do?

  • Don’t buy excess inventory; forecast your needs appropriately
  • Return excess inventory
  • Sell slow moving items by running promotions
  • Minimize the use of inventory on consignment with customers

 

For more information on this topic, please feel free to email me at kbolin@anderscpa.com.