Inventory management helps prevent capital from being tied up for too long by tracking the quantity, value, and location of your stock at all times. Without efficient stock control, you risk holding too much product and therefore relying heavily on your sales and marketing teams to clear it. On the other hand, if you don’t have enough stock, you could struggle to meet demand, thereby forcing customers to order from competitors instead.
Here are some tips on how to hold enough stock to fulfil orders even when demand swells, but not so much that you tie up cash in inventory that could be put to better use elsewhere.
Problem: You’re tying up too much money in stock
Let’s say that on average you sell one unit of a particular product per week. With 300 units of this product in your warehouse, you’d have enough stock to last for almost six years. Unless the product is super low-value, this kind of overstocking means effectively putting your company’s cash out of reach on your warehouse shelves for a long time.
As well as tying up capital, you risk holding inventory that could become outdated or obsolete. Imagine tripling your stock of smartphone cases, only for a phone model with new dimensions to be released two months later. You could be forced to sell the stock at a heavily discounted rate, perhaps even at a loss.
Solutions: Conduct frequent stock checks and forecast demand
To avoid overstocking, conduct regular stock reviews. That means counting every single item in your warehouse and cross-checking quantities against your inventory records. Knowing precisely how much of any given product you have in stock means you can avoid buying more until you’ve cleared it. To speed up this process, consider investing in handheld scanners that integrate with inventory management software such as Xero or Cin7.
You should also track sales to forecast demand. By using historical sales and orders in the pipeline as a guide, you can predict how much product you’ll need at different times of the year. Don’t forget to account for any upcoming promotions or marketing campaigns and how they could affect demand.
Problem: You’re frequently out of stock
An obvious solution to overstocking is holding very little product in stock. However, understocking comes with its own risks, including missed sales opportunities, harming customer loyalty, and extra catch-up costs when you rush to meet the sudden demand (e.g. paying for faster shipping or staff overtime to pick and pack a large volume of orders).
Solution: Calculate your safety stock level
To find the "Goldilocks zone" between overstocking and understocking, you need to calculate how much safety stock you need as a buffer. You want enough to cover a higher than average volume of orders, but not so much that you tie up too much capital in inventory.
There’s a formula you can use to calculate your safety stock based on maximum and average usage and lead times.
Let’s imagine you sell sustainably produced jewellery using handmade beads made in Peru. It takes an average of 45 days for the beads to reach your workshop in the UK (average lead time in days) but sometimes takes up to 55 days when materials are in short supply in Peru (maximum lead time in days). You sell about 15 beaded necklaces per day (average daily usage), but on weekends you can sell up to 20 (maximum daily usage).
With 470 units of safety stock, selling about 115 per week (15 per day on weekdays and 20 on weekend days), your buffer of inventory will last roughly one month. You should keep this number of units in stock at all times and reorder once you’re close to dipping into this "war chest".
Use data to make inventory management more efficient
The more visibility you have over your inventory, the better equipped you are to make strategic decisions about the types and volumes of products you buy and when you should place orders with your suppliers.
Try to consolidate inventory across the whole company as much as possible so that you can see what you have and where it sits in a single view. For example, a software solution that simultaneously tracks stock on your website, store and warehouse can help you avoid taking orders that you can’t quickly fulfil or buying stock that you don’t yet need.
Managing your inventory efficiently helps free up capital for investment in other areas of your business, such as marketing, product development, new equipment, and additional staff.
Another way to add flexibility to your cashflow is by extending the amount of time you have to pay your suppliers. While you may not be able to negotiate their payment terms, the American Express® Business Gold Card could offer you greater control of your cashflow. It gives you up to 54 days1 until your payment is due, so you can keep money in your account for longer.
1. For Business Gold Cards the maximum payment period on purchases is 54 calendar days and is obtained only if you spend on the first day of the new statement period and repay the balance in full on the due date.