Small business tips inventory and cash flow

Posted: 02/09/2007--25/11/2008 || Rate this Article: 3 || Views|| Sign In || Register ||Hello Guest

Small Business Tips - Inventory and Cash Flow

In a small business, inventory and cash flow are the heart and lungs of the operation. Inventory greatly impacts cash flow, especially in small organizations where cash is more difficult to get hold of than in a large corporation. In a small business, cash flow problems are usually the first signs of financial trouble, and inventory problems are signals that the nuts and bolts control of a company require attention. A good businessman knows that too much inventory is as dangerous as not enough, since money tied up in inventory can severely hamper a small companys cash flow.

Cash flow is concerned with the movement of money in and out of a business, and the timing of that flow. Accounts Receivable and Payable, depreciation, expenses and other factors affect it. Cash is an essential ingredient in building a business; it acquires products and services for a business, and these are sold for a profit, producing more cash. Businesses, rightly, focus on profit, but, if buyers are slow to pay their bills, paper profit means little, and there wont be enough cash available for replenishing inventory, expanding, or even, eventually, running the business.

A small business owner should invest in, and become familiar with, accounting software that controls Accounts Receivable, Accounts Payable, Inventory and General ledger at a minimum. PC software is very inexpensive compared with most business expenses, and will pay for itself in a matter of weeks.

Software will allow you to closely monitor your receivables. If you are able, through a combination of reminders, incentives, and personal contacts, to permanently decrease average payment time from six to four weeks, you will have acquired a tidy sum of money for your business. For instance, if receivables are, on average, $20,000 per month, you will have netted $10,000 which can be plowed back into the company. The basic idea is to improve the speed with which you turn your goods into receivables, and receivables into your cash flow. There are specific techniques for doing this:

-Offer discounts to customers who pay promptly.

-Obtain a deposit at the time orders are taken.

-Make credit checks.

-Issue invoices promptly and follow up if payments are slow.

-Track accounts receivable to identify slow-paying customers. Institute a policy of cash on delivery for slow-paying customers.

-Sell old inventory at a discount

To further increase cash flow the astute businessman must carefully watch his expenses.

-Pay just in time.

-Take full advantage of creditor payment terms. If a payment is due in 30 days, don't pay before that time, and use electronic funds transfer to make payments. This way you will remain current with suppliers while retaining use of your money as long as possible.

-Look out for discounts

-Stay in touch with your suppliers.

-Don't always focus on the lowest price when choosing suppliers. Sometimes more flexible payment terms can improve your cash flow more than a bargain-basement price.

Along with a more productive cash flow, the business owner can enhance profits by imposing more rigorous control over inventory, which is an asset, but also a money sink. A small business owner who imports CDs from Thailand may keep 100 copies each of 1000 titles in stock. Analysis might reveal that many titles sit on the shelf for weeks, and eventually become obsolete. Ten titles may require more than 100 copies in inventory for prompt service; ninety titles may require many fewer.

Lets say that analysis reveals that, on average, only 30 copies of each title are required as inventory, and that the supplier can speed delivery for the more popular titles. If each title costs the small business owner $5, then the money tied up in inventory falls from $100,000 to $30,000. The business now has a windfall of $70,000 to play with.

Another approach to inventory is to prioritize your inventory needs. The most expensive items in your inventory are not necessarily the most profitable. Less expensive items with higher turnover have a greater effect on your business than more costly items. Focusing on high dollar-value items runs the risk of selling out of the lower-priced products that contribute more to your bottom line. If 85 percent of your revenues come from only 15 percent of your products, concentrate your efforts on the key 15 percent of items.

Cash flow is the movement of money in and out of your business. Your inventory is your goods or services. These are the cornerstones of your business. Cash is your constitution, and inventory is your country. Understand your cash flow, and refine your inventory needs, and you will have a healthy business.