Improve Cash Flow by Stopping “Just in Case” Management
Improve Cash Flow
Almost every business wants to improve cash flow. The one common phrase I hear from business owners who struggle with cash flow and profitability is “just in case”. When I conduct a financial review of manufacturers, distributors, and trades businesses I often find they have too many employees or are carrying 50% to 100% more inventory then needed.
When we tour the stock room and review inventory levels we often find popular items to be turning much slower than the desired level for their sales volume or there is an inch of dust on products from sitting so long. When I ask why they carry so many low volume items the answer is usually “just in case” someone needs it or they carry too many employees” just in case” it gets busy or someone calls in sick.
As these business owners hold on to their “just in case” philosophy of running their business they struggle to meet payroll, pay their suppliers, or can’t grow due to a lack of funds. With interest rates expected to increase in the next few years we should pay very close attention to our inventory levels. The double digit interest rates of the late 70’s and early 80’s taught business the real cost of carrying too much inventory. The carrying charges alone had a dramatic effect on cost of goods causing many companies to struggle or go out of business.
Apply the 80/20 Rule
I suggest applying the “80/20 rule” to inventory management. In almost every case 20% of the SKUs produce 80% of the revenue. This means that 80% of the SKUs are producing only 20% of the sales. This is a significant amount of money to tie up for the occasional sale. If part of your value proposition is to have slow moving items on hand as a convenience for your customers, then the margins should be higher. It is often more feasible to ship in these low selling items on an as need basis with the understanding that you will make less margin. The benefit is that you will free up cash to grow your business instead of tying it up on slow moving items that produce little profit.
“Just in Time” instead of “Just in Case”
Instead of “Just in Case” inventory management try to adopt a “Just in Time” philosophy. In a perfect world, new items will come in the back door just as old items are sold out the front door. The key is to find a balance between having enough stock so you don’t run out but not sitting on more inventory than needed. Systems should be in place that allow you to manage this very closely.
With interest rates expected to rise in the coming years those who effectively adopt a Just in Time system instead of a Just in Case philosophy will earn higher profits, have more flexibility to grow and allow the business owner to enjoy more of the fruits of their labour.
