The Cost of Business Inventory and its Impact on Cash Flow
Did you know that one of the main factors that can significantly impact your cash flow is your inventory? Businesses need to take stock of what is sitting on their shelves and make sure they are keeping an accurate account of what they have and don’t have. If you’re not keeping an accurate track (including value), you should be. Your inventory could have more cash tied up than you realise.
What is Inventory?
Inventory is the term used for the raw materials, finished products, and even partially completed products that a business uses in its production process. Inventory can also include business items such as office equipment and stationery. It’s important to keep track of your inventory because it has a major impact on a company’s cash flow.
The level of inventory a business holds will depend on several factors, including the type of business, the production process, the potential to change value/become obsolete or perish, and how quickly products sell.
How too much or too little inventory can impact cash flow
For many years the drive for “Just in Time” ruled stock levels, but events of recent months with disruption in supply lines have often questioned this perceived wisdom, but having too much inventory can tie up a lot of cash that could be used elsewhere in the business such as paying bills or taking advantage of new opportunities, so it’s important to strike a balance. Too little inventory, on the other hand, can lead to production delays and unhappy customers. It’s, therefore, crucial to get the level of inventory right for your business not just with current events but with an eye on what might yet come.
Inventory Management Tips for Small Businesses.
There are a few things you can do to make sure your inventory levels are where they need to be to maximise your business cash flow, such as:
- Keep track of stock levels: This one seems obvious, but it’s important to keep an accurate count of how much inventory you have on hand at all times. That way, you’ll know when you need to order more and when you have too much.
- Know the delivery times of your supply chain and likely disruptions: Ensure you keep talking to suppliers so you can know when issues are arising before they become a problem for you.
- Review your inventory regularly: This will help you spot any potential issues, such as items that aren’t turning into cash quickly enough, it all adds up to money being tied down. If you find that you’re constantly running out of certain items, it may be time to increase your order quantity. On the other hand, if you find that you have too much inventory, you may need to cut back on your orders.
- Plan for inventory turnover: Every business is different, but most businesses will need to turn over their inventory every few months. This means selling off the old inventory and replacing it with new inventory. Planning for this will help ensure that you always have the right amount of inventory on hand.
- Keep your suppliers on side: By paying to terms, they will remember this when you need extra help or a rush order.
How invoice finance can help
If you sell to other businesses on credit terms and you have cash tied up in your stock, the last thing you need, when you do achieve the sale, is then to be waiting another month or more to be paid. All you have done is move the cash tied up on your shelves to cash tied up in your invoices. This is where invoice finance comes into play as a viable and flexible solution.
Invoice finance is a facility providing access to the cash tied up in the value of unpaid invoices, no more waiting to be paid – giving businesses more financial flexibility whilst getting access to their money when they need it most.
The benefits of invoice finance
- Businesses can release around 80-90% of the value of invoices straight away and receive the balance (less costs) when their customer pays.
- Other assets are not needed to access invoice finance.
- Invoice finance can be used even if you’ve been previously rejected from the bank, might not be considered creditworthy, or have only recently started trading.
- Helps you bridge the gap between invoicing the end customers and receiving the final payment.
- Helps manage peaks and troughs in cash flow as your business grows.
Contact Partnership Invoice Finance today and let us assist you in establishing a healthy cash flow for your business and bottom line.