Focus on Cash Flow (Part 3): Optimising Stock Management
Stock control is always going to be a balancing act – too little and you might be sacrificing sales, too much and you’re tying up cash unnecessarily.
The usefulness of stock in leveraging working capital is often overlooked in favour of ‘easier’ options – usually increased focus on debtor and creditor management (the subject of my previous blogs: Optimising Supplier Management and Optimising Debt Collection).
So here are some simple tips to maximise the effectiveness of your stock control systems, and improve your business’ cash flow at the same time:
- Conduct regular stock takes – monthly or quarterly stock takes are fairly standard depending on the size and nature of your business. Use the stock take to identify fast and slow moving stock lines.
- Understand your sales market – Learning what drives product demand and staying abreast of consumer sentiment and fads will help you quickly identify changes in demand and either increase or decrease your purchasing accordingly.
- Regularly review gross margin – Understand what drives the cost of your products and pass on cost increases wherever possible. Where cost price increases are unlikely to be able to be passed on consider dropping the stock line.
- Monitor slow moving stock – Identify slow moving stock through the stock take process and implement a strategy to move it as soon as possible. Cash earned through sale of slow moving stock can be used to purchase faster moving items.
- Implement an automated stock control system – Among the benefits of an automated system is the ability to set re-ordering parameters to ensure stock is only purchased when needed. If you have an automated system revisit the trigger points as they might need to be reset.
- Use volume based supplier discounts prudently – Investing in large volumes of stock to lower costs only to increase your holding costs is counterproductive.
- Consider negotiating smaller and more frequent deliveries from suppliers to smooth out cash flow (and order pre month end to be delivered early in the subsequent month thereby giving you 55 days interest free)
- Ensure when you place an order you set the delivery date for week one of the month and do not allow for early delivery of stock.
- Implement rigid sales discount policies – Implementing appropriate policies and ensuring sales staff are aware of their authority limits will eliminate the risk of under-pricing.
A strong understanding of how and why stock moves through your business, combined with implementing some basic review procedures, will put you in a much better position to maximise all of your business’ working capital ingredients.
Elizabeth Mawby was a former Client Director at Vantage Performance, Australia’s leading business transformation and turnaround firm – solving complex problems for businesses experiencing major change.