Sustaining and growing an online business could be a nightmare without healthy cash flow. Without it, a seller can’t pay suppliers and employees which means there will be nothing to sell or do in the company. Inventory management is the key to achieving a healthy cash flow. With greater inflows than outflows, businesses have extra resources to grow and expand with proper inventory management. Inventory control and cash flow are inextricably linked. Read about the Inventory Control Techniques here. The levels of inventory stock you hold, your turnover rate, and the accounting method you choose, affect revenue generation.
Healthy Cash Flow
Cash flow is the blood that keeps a business alive. It’s calculated and presented on a budget sheet with inflow and expenditures, but it doesn’t paint the entire financial picture of a company. You need to assess debt levels, profitability rates, and various other factors to ensure a business’s financial security. A positive cash flow is a great indicator of stability for any business. Click here to read about the 8 ways to increase the cash flow in your business.
Inventory Affects Cash Flow
A cash flow cycle can be best described as your inventory providing you with the initial money to purchase supply, and then being turned back into a liquid asset when sold. This is an interesting way to understand how finances and cash flow works in a business setup. Also, poor management of supplies can lead to fewer sales which hurts cash flow. Cash flow is affected by spending too much on inventory or earning less from sales. To elaborate, we can state the following:
Stocking Of Supply
A poor understanding and improper tracking of your inventory lead to miscalculating both how much you have and what it’s worth. This affects not only the money that goes into buying new products, but also the revenue from sales of those same items. If you’re too low on supply or high on demand for an item, then this could negatively impact your cash flow by either increasing expenditures for more stock or decreasing revenues as fewer people buy at lower prices due to oversupply.
Order Issues From Inventory Management
Your customers will be unhappy and stop purchasing your products if you continue to provide poor service due to a lack of inventory management. Poor inventory management can also lead to order issues, which in turn causes customer dissatisfaction that hurts cash flow. Without an accurate picture of your inventories, it’s easy to process orders without being able to deliver the product on time or at all. A fall in sales affects cash flow severely.
Keeping your inventory under control is the best way to ensure you have enough products for demand. Better inventory management leads to a strong, positive cash flow and fewer expenditure problems. Click here to read in detail on how to manage inventory when you have multiple warehouses.
Inventory Management Practices For a Better Cash Flow
The importance of inventory management cannot be overstated. Not only does it have a direct effect on cash flow, but it’s also the most important area that needs to be optimized for almost any business model.
Achieving an effective inventory management strategy seems like a daunting task. The following inventory management tips will help you get your business to a positive cash flow.
Treat Inventory As An Investment
Inventory management is a crucial part of running any business, and it should be treated with the utmost attention. Make sure you are settling your inventory records regularly so that you have an accurate knowledge of your stock. An efficiently managed inventory will improve the cash flow for your business.
Calculation Of Cash Flow Based On Inventory
Managing your inventory effectively is recommended when it comes to calculating cash flow. For example, if you find that there has been an increase in outflow over inflow during a certain timeframe (unsold items), take note of what caused this change so you can implement appropriate strategies quickly before things get worse.
Re-assessment Of Inventory Valuation Method
The way you choose to value your inventory will have a huge effect on how much money flows in and out of the business. For example, if FIFO is chosen then it would be more expensive upfront but cheaper over time.
Inventory management is a tough job. Too many problems can arise and wreak havoc on unprepared businesses; it’s best to have an effective plan in place for trying times. Having a well-chalked-out plan to address any crisis not only ensures a steady flow of cash but saves your business from getting bogged down.
Accurate prediction of demands plays a crucial role in effective inventory management. This can be difficult, but you can take the help of analytical tools to make the process simpler. To predict your future sales, be sure to consider things like market trends and previous year’s sales during specific periods; however, don’t forget about seasonal demands or upcoming promotions.
Drop shipping Whenever Possible
Drop shipping is practically the perfect solution for those who don’t want to deal with inventory hassle. With this, you can order items from a wholesaler or manufacturer and they will take care of all aspects like shipping it out to the customer when necessary without any involvement on your side.
Inventory Management System
The best way to improve your company’s cash flow is by getting a good inventory management system. There are many options for this, and ZapERP is one of the better ones out there at the moment. It has an excellent stocktake feature that allows you to divide up store inventories into sections so it can quickly count them with its manual or barcode scanning modes.
An effective inventory management system is of immense importance to any business. It’s the backbone that keeps your cash flow running smoothly and leaves you with a better chance for survival in this competitive world.