The success of a business depends greatly on inventory management and cash flow. Inventory is all the stock you have of raw materials, finished goods, work in progress, in-transit goods, MRO goods, etc. Inventory Management deals with ordering, storing, and utilising the stock of goods effectively.
The other most significant part here is cash flow. It refers to the inflow and outflow of cash while doing business activities; for example, taking a working capital loan would be an inflow of cash, and its repayment would be outflow.
In this article, we will discuss 7 best practices you can adopt for better inventory management and cash flow.
Best Tips for Inventory Management and Cash Flow
Sources of credit
Capital is first the things you need to get a business up and running. If you are a growing business, you will need funds to keep up the business operations.
Many businesses start falling short of cash while expanding, and you don’t want that to happen to you. That’s why it is necessary to have reliable sources of funds like MSME loans.
When looking for sources of credit, make sure that you choose a reliable source that provides fast service at a reasonable interest rate.
Pareto’s rule is also known as the 80/20 rule. The concept states that 80% of your sales is attained by 20% of your stock, whereas the rest, 80% of the stock, drives only 20% of sales.
Why does this happen? Usually, the seller stocks all the variety of different goods so that the customer won’t leave without having what they want.
On the surface, it may look like it’s the right way to operate, but it can actually lead to wastage of both inventory and money. To get the maximum out of your inventory, focus on the 20% that is generating 80% of your sales.
Forecasting is an essential part of management functions. It facilitates planning and lays the foundation for future operations. Forecasting plays an important role in inventory management too. It answers important questions like:
- Which item(s) of the stock is crucial in driving sales?
- How much quantity of a particular item is required?
- How long does a batch last?
- How much money should you spend on a particular item?
This forecasting is done after thoroughly analysing the reports of orders, their cost, the sales they generated and other elements, so you get an actual picture of your operations.
Invest in technology
Small businesses usually maintain stocks that can be hectic and prone to have inaccuracies. If you are a growing business, you want to invest in inventory management software that makes the entire process easier and more accurate.
Inventory management software helps in keeping track of orders, remaining stock, deliverables, and sales.
Benefits of using inventory management software include:
- Increase in sales
- Better profits
- Reduces the odds of going out of stock
- Easy processing
- Reduces aged stock
- Automation of all the operations (makes the data more accurate hence more reliable)
- Accurate tracking
Regular cash flow analysis
Like inventory management, cash flow management also involves analysing funds to get a clear picture of a firm’s financial position.
You must have studied Cash Flow Statements in which the cash inflow and outflows are divided into three categories: operating activities, investments activities and financial activities.
This statement communicates the flow of cash that is associated with business activities.
Cash flow analysis should be done regularly, i.e. monthly, quarterly, half-yearly or annually. How often you conduct these analyses depends on the scale of your business, the kind of business you are engaged in, etc.
These analyses consider all the sources of funds, like small business loans, sources of income, expenses, investments made by businesses and many other things.
Also, there are many accounting software available in the market for creating cash flow statements. This will help you identify cash flow-related problems if there are any, and the insights gained can be very useful in making sound financial decisions.
First In, First Out (FIFO)
First In, First Out is a very popular inventory management strategy that states that the stock bought first would be sold first. This is a very practical method that is applicable mainly where perishable goods are involved. But this does not mean that it cannot be used with non-perishable goods.
If you have a batch of goods stored in for a long time, it may start to wear down, which is good for no one. In the end, you will have a heap of damaged goods that did not generate any sales and profit. This would be a blow not only in inventory management but also in your cash.
Another benefit of following this practice is that it helps in keeping up with the trend.
When you place an order, you buy things that are in demand at the moment. By following FIFO, you sell the trending items instead of having them for a long time.
Build a cash reserve for contingencies
The business environment is unpredictable, and so is the market. The cash that is available to you for borrowing, depends highly on the cash in the economy. All these factors can affect your business negatively if you don’t plan.
One of the best ways to deal with the shortage of funds in business is by creating a reserve for future use. Consider this: you need a working capital loan, but it is taking forever to get it sanctioned because of all the formalities and things.
Wouldn’t it be better to have a reserve that can help you in this situation? Thus opting for business loans can help you with your financial needs.
These inventory and cash-flow management methods can help you a lot in managing your day to day business operations smartly and practically. The implementation of these strategies can help you in going a long way ahead.
If you require MSME or small business loans to kick start your business, contact ZipLoan, where you get a loan in just three days with minimum documentation and flexible interest rates.
Frequently Asked Questions
The role of inventory management is to maintain appropriate stock levels for the business’ needs, minimising wasted inventory, funds tied up in stock, and lost income through stocks dropping too low.
Inventory management helps companies identify which and how much stock to order at what time. It tracks inventory from purchase to the sale of goods. The practice identifies and responds to trends to ensure there’s always enough stock to fulfill customer orders and proper warning of a shortage.
A good inventory management strategy improves the accuracy of inventory orders. Proper inventory management helps you figure out exactly how much inventory you need to have on-hand. This will help prevent product shortages and allow you to keep just enough inventory without having too much in the warehouse.
5 Basic types of inventories are
1) Raw materials
3) Finished goods
4) Packing material
5) MRO supplies
Inventory management is important to small businesses because it helps them prevent stockouts, manage multiple locations, and ensure accurate recordkeeping. An inventory solution makes these processes easier than trying to do them all manually.
The basic formula for calculating ending inventory is: Beginning inventory + net purchases – COGS = ending inventory.
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