Cash Flow Swing Factors – Inventory Management
We’re swinging our way through the Cash Flow Swing Factors. Now that you have Accounts Receivable all wrapped up, it’s time to take a look at Inventory. Let’s start with a (harsh but true) formula:
Inventory = cash. Idle cash.
Did we just make you a bit twitchy about your plump stockroom? We’re sorry, but we’re not that sorry – after all, we’re here to help you get the cash flowing.
When you spend money on inventory, you want to convert it into income from your customers as soon as possible. After all, inventory generates zero cash sitting on your warehouse, retail or shop floor. So it’s imperative to get your arms around this second Cash Flow Swing Factor.
Before you start frantically canceling all your incoming product orders, take a deep breath. You also don’t want to lose sales because you didn’t have sufficient product on-hand to meet demand.
Inventory management is a high-wire balancing act.
There are libraries full of books written on effective inventory management. We could spend days exhaustively detailing strategies, but our fingers would cramp up. Start with the super-handy list below, and give us a call for the full-blown, nitty-gritty, strut-on-that-high-wire details.
Steps For Streamlining your Inventory Management
- Improve communications in the supply chain. Traditionally, companies have held “safety stock” at each level of the supply chain. To reduce safety stock without impacting customer service, consider utilizing web-based inventory level notification tools. That should also help you with the second tip.
- Reduce supplier lead times. Lead times have a significant impact on how much inventory you need to have on hand. The shorter the lead time, the less safety stock. Measure lead times for each of the supply chains and, when you spot room for improvement, strive to negotiate for shorter lead times.
- Standardize where you can. This can include re-engineering the product to use less material and/or fewer components, or it can mean working with your supplier to consolidate common part numbers.
- Improve supplier quality. Poor delivery consistency = more necessary safety stock. Poor product quality = money spent on rejections, rework, warranty, inspection and excessive expediting.
- Speak up. Don’t hesitate to challenge Minimum Order Quantities and Price Quantity Breaks. Suppliers charge these to mitigate their set-up cost. The goal is to help the supplier reduce set-up costs. Consider an annual purchasing commitment that enables smaller order quantities.
What gets measured gets impacted. Here are some reports to help you monitor the overall effectiveness of your inventory strategy:
- Inventory Turns: How many times inventory turns over in a given period of time (usually a year).
- Inventory, Shrinkage Cost: The percentage of inventory value lost per period due to damage, pilferage, deterioration and obsolescence.
- Gross Margin Return on Inventory Investment: The GM ROII multiplies Inventory Turns (which measures the health of our stock) by Gross margin (which tells us the percentage of profit we make on each sale).
- Inventory Lead Time: Lead time is the length of time it takes to obtain inventory from suppliers.
- Stockouts in Period: Stockouts indicate where a demand cannot be met due to the absence of the required inventory.
- Percentage of On-Time Delivery: This percentage reflects the extent to which we have delivered our goods according to the customer’s desired timeframe.
The best way to navigate this high-wire balancing act? Run the reports. Look for opportunities for improvement. Negotiate. Streamline. And don’t be afraid to ask for help. We’re just a phone call away, and offer exceptional balance with our cash flow management services.
One of the best ways to gain a macro view of your business is through SG&A Reporting.
If you’re looking for a trustworthy bookkeeper or accountant, contact us today to learn how Owl can help you.
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Continue to PART THREE
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