Improving cash flow is always a big help regardless of the type of business you’re running, the volume of your company, or how long your business has been around. Every company faces the hardships of managing cash flow and the more one can improve the process, the better off the business becomes. In case you are using a multichannel ecommerce platform to sell your items, a healthy cash flow becomes all the more important. After all, if your customers or sales channels are sluggish with payments, you won’t be able to pay your suppliers and employees. And if you can’t pay them, you would neither have any inventory nor any people to run the business.
There’re several ways to improve cash flow in a business. From financing activities to investing activities to operating activities – a company can use any or all of these vehicles to improve cash flow. However, while the first two options may not be fit for every business, the last one (operating activities) can be leveraged by almost all businesses. And in operating activities, inventory management is the most important area that needs to be optimized.
Improved cash flow and effective inventory management is directly related, somewhat in the same way that poor inventory management leads to cash flow problems and additional costs.
Effective inventory management may seem like an uphill task. From ensuring correct stock levels and stocking the right products to incorporating new product lines and discarding unsold items – a lot of concerns need to be addressed.
In this post, we bring you some essential tips on inventory management, following which you’ll be well on your way to improve cash flow in your business. And if you’re already enjoying a positive cash flow, these tips would help you do even better.
Consider your inventory an investment
Inventory management is as crucial as maintaining your business bank account, and thus, it should be treated with the same level of attention. For instance, if you settle your bank account weekly, do the same with your inventory records. By doing this, you’ll have complete knowledge of items that are left in stock and those that you’ll need to reorder in proper time. An efficiently managed inventory is guaranteed to improve cash flow of your business.
Calculate your cash flow based on your inventory
When it comes to managing your inventory effectively, it’s recommended to calculate your cash flow on the basis of your inventory. For example, locate the inventory balances of the current year as well as the previous year. Now, calculate the difference between them. This difference reflects the amount of cash flow created by the change in your inventory. Here, unsold inventory means cash outflow. If you find an increase in cash outflow, it means you need to track the volume of items and implement strategic inventory control policies.
Re-assess your inventory valuation method
Your inventory cost varies every time you make a purchase because the buying price can inflate or deflate based on demand. There’re different methods of inventory valuation that you can use like FIFO, LIFO etc. The nature of your business should be the basis of your choice of inventory valuation method. However, you should remember that your preferred inventory valuation method to determine the inventory costs would have a direct impact on your cash flow. For example, the use of FIFO would result in a reduced cost of goods sold, while the use of LIFO would cause a higher cost of goods sold during times of inflation or rising prices.
Consider contingency planning
Inventory management can involve a lot of issues that can easily cripple an unprepared business. These may include
To avoid these, a proper contingency plan has to be in place. Define the plan on the basis of things like what steps can be taken to resolve the issue, how to manage other parts of your business effectively if any of these issues arise etc.
Accurate prediction of demands plays a crucial role in an effective inventory management. This can be incredibly difficult to attain, but you can take the help of different analytical tools to make the process a little simpler. To project your future sales, be sure to consider things like market trends, previous year’s sales during a specific period, current year’s growth rate, seasonal demands, guaranteed sales from subscriptions and contracts, and upcoming promotions, just to name a few. If you need professional help to generate a more accurate forecast, be sure to seek it.
Implement internal policies
As an ecommerce business owner, you have to gain total control of your inventory in order to improve business cash flow. To attain this, you need to implement strict internal policies. For example, stop manufacturing or buying those products immediately that don’t sell. Doing this may seem a little difficult, but you have to understand that it’s a complete waste of cash and eats up your profit margin too. In case you maintain safety stock, clearly define whether or not to use it, situations when it can be used, etc. Develop a separate policy to identify and liquidate obsolete items and execute the policy every quarter or every month.
Just like the success of your business greatly depends on inventory management, cash flow heavily depends on your relationship with your suppliers. Take time to evaluate the terms you presently have with long-standing suppliers and re-negotiate those terms if you find they’re hurting your business. If you identify a problem with an existing relationship, try to fix it immediately. And when you’re taking on new suppliers, be sure to check out their credibility.
Find out the nature of your inventory
Do you manufacture the items? Do you mainly deal with slow-moving items or perishable items? If you manufacture your items, chances are they get mingled all the time. In this scenario, hiring a dedicated resource, who can generate an inventory valuation report periodically with adjusted inventory level, can prove to be of great help. A better alternative is to deploy a good inventory management software like the one offered by eChannelHub that has been programmed to generate inventory value report automatically based on your preferred method. If you deal with perishable goods, be sure to dispose of that inventory first which is closer to the expiry date.
Consider dropshipping whenever possible
From an inventory management standpoint, dropshipping is an almost perfect method. Here, the wholesaler or the manufacturer takes complete care of the items instead of you having to carry the inventory and ship items yourself. Dropshipping as a service is offered by many manufacturers and wholesalers. It’s recommended to check them out, whenever possible. Though items may cost more this way, you don’t need to worry about expenses associated with holding and managing inventory, as well as order fulfillment.
Deploy an inventory management system
Getting a good inventory management system is the best thing you can do in order to improve business cash flow. A number of inexpensive and easy systems are available these days, one of which is what eChannelHub offers. This inventory management software offers integrations with all major online marketplaces. From eBay inventory management to Etsy inventory management to Amazon inventory management, and much more – eChannelHub’s inventory management software lets you sell on a wide range of channels to improve your sales, and thus improve cash flow. In addition, its inventory management system offers a multitude of benefits to take your inventory management to the next level. From helping you in taking better merchandising decisions, and synchronizing real-time inventory data to streamlining end-to-end inventory operations, and improving inventory accuracy – it helps you in everything you need to manage your inventory effectively, thus letting you improve business cash flow.
An effective inventory management system is of immense importance to improve cash flow of your ecommerce business. With a proper system in place, you’ll always stand a better chance of survival and profitability. Take a closer look at the inventory operations and you’ll surely identify the operational gaps that are holding you back from improving your business cash flow. Mitigate those gaps to achieve your targeted revenue.