Inventory management is vital in any business. Do you know how stock control affects cash flow? What are the various types of cash flow that you know of? How does cash flow management work? Why should you enhance your inventory management? What is an inventory management solution?
Inventory is the number of goods a business intends to sell for a profit. Inventory management is essential in all companies because it helps them to identify the amount of stock they have and what needs to be ordered. With enough stock, customers’ orders will be fulfilled in time.
Advantages of inventory management
- Customer satisfaction. By providing your customers with what they want in time, they will be loyal to you.
- It saves money.
- It improves cash flow.
Cash will move through your business if you know which inventory to spend money on.
How can stock control affect cash flow?
Inventory management directly impacts the cash flow of your business. The amount of money that goes in and out of a business is known as the cash flow. You use the money to buy your supply, and when your inventory sells, you get back your money.
The cash flow in a business depends on how you source and manage your inventory. Too much inventory increases storage costs and ties up cash that could have been used for other see essential things like paying bills. With little inventory, sales are lost, and you might run out of inventory. For a steady and consistent cash flow, inventory management is essential. Poor inventory management leads to reduced cash flow. Your business will get fewer sales if it has issues with customer orders and stocking its supply.
Types of cash flow
1. Cash flow from financing
It is the funding from investors, company owner, or creditors. It’s classified as equity, debt, and dividend transactions in the cash flow statement.
2. Cash flow from investing
It shows the amount of funds spent or made through investment activities within a specific period. These activities include purchasing long-term and fixed assets, merging with other companies, and investing in marketable securities like bonds and stocks.
3. Cash flow from operations
It is the amount of cash a business generates or consumes for its standard operating activities such as bills, sales, and wages. Businesses generate funds by offering services to customers or selling and producing goods. CFO shows if a company has enough funds to pay its expenses and bills.
How does cash flow management work?
Cash flow management helps forecast future cash needs and ensures the company has enough money to meet its needs. In financial planning, cash flow management is essential to prevent challenges like bankruptcy and help your business to stay financially stable. The steps for cash flow management include:
Create a list of all your expenses such as salary, rent, loan repayments, software fees, and loan repayments. Write down the type of expense, the amount, and the due date.
Write down guaranteed revenue and predict if the cash flow is rising, constant, or reducing. Use data from the past to help with the projections.
Fill in your revenue and expenses data in the cash flow projection template.
Update projection spreadsheet
Update your cash flow spreadsheet frequently.
Why should you enhance your inventory management?
1. To improve cash flow
With proper inventory control and planning, you can manage how your money is spent and know the amount of inventory needed and when.
2. To reduce the cost of inventory
It helps in inventory reduction by reducing the amount of obsolete stock and negotiating a better price with the vendor. Invest in an inventory management system to get a notification when it is time to purchase your inventory.
3. To increase profit
If you understand inventory processes and order fulfillment, you will make better decisions that improve the company’s profit. You will sell inventory before it becomes obsolete and make better purchase decisions. Inventory management helps to reduce taxes and boost your profits by minimizing misplaced stock, lost sales, and excess ordering.
4. To reduce labor costs
Managing inventory and running a warehouse requires a lot of labor. Efficient employees who make intelligent decisions will save your business a lot of money.
How to ensure strong cash flow management?
1. Financial reviews
Constantly review and update your cash flow forecast to reflect what is happening in your business and correct the assumptions made while creating the cash flow forecast.
2. Cash flow forecast
If you want to be notified of a problem before they arise, make accurate and frequent cash flow projections. Create a list of assumptions and use it to base your forecast. The forecast should predict if there will be an increase in the price of raw materials. This information helps you to determine how much you will charge your customers. Consider the current trading environment and season to determine growth projections and sales reduction.
3. Report management
Your financial reports should be up to date to reflect your monetary situation.
4. Calculate revenue
After getting a reasonable idea about how your sales will go, consider the revenue it will bring. Consider the time you will get payment for the sales made.
5. Identify expenses
The expenses for a business include rent and rates, salaries and wages, directors’ remuneration, insurance, suppliers’ cost, interest payments, and new assets purchase.
What is an inventory management solution?
If you lack accurate real-time information about your inventory, your business will be inefficient. Poor inventory management increases the risk of making mistakes like selling non-existent inventory and reordering inventory from suppliers. Because of this, your business will lose sales and repeat customers. Inventory management solution includes:
The demand forecasting tool is integrated with sales and accounting data to predict demand and schedule based on shifting material availability, customer preferences, or seasonal trends.
Use tracking software that has automated features for procurement and re-ordering. These platforms provide a cloud-based and central database for real-time data backup and automatic inventory updates.
Conduct regular stock auditing processes to reduce human error and produce up-to-date and accurate inventory data for cash flow management.
Optimize inventory flow and storage space by using inventory management systems that have warehouse management features. Organize and store your inventory in compartments and shelves, and automate the packing, picking, and shipping of orders.
Outsource inventory management
Outsourcing inventory management to an expert helps to provide online support and in-person training to help employees work with technical inventory management software features.
The amount of goods that a business intends to sell for a profit is known as inventory. Proper inventory management ensures customers get their orders in time because you will be aware of the amount of stock you have and what needs restocking. For a business to be successful, ensure the cash flow is managed properly.
Your business will get fewer sales if it has issues like keeping up with customer orders and stocking its supply. Most companies generate cash from financing, operations, and investments. You should enhance inventory management to improve cash flow, reduce the cost of inventory, increase profit, and reduce labor costs.