How To Estabish Payment Terms With Your Suppliers

settling terms of payment

How To Pay Suppliers, Establish Credit, Deal with Future Delivery Problems

In most of the relationship between suppliers and the business they supply to work on some sort of credit basis.

A supplier who has been supplying merchandise for business on a regular basis, expects to give a time period of credit for about 30 to 60 days and expects payment sometime within this period.

A business might find it particularly convenient to have some sort of a line of credit with the suppliers. However, as a new business, do not be surprised if your supplier is not ready to extend credit.

As a startup business, you would probably not have any credit rating with your bank as well since the account will only be recently opened and will not have a credit history.

One way you can counter this lack of history is by approaching a supplier that is relatively smaller. You may have more weightage and be able to convince the supplier more about your credibility them by approaching a large supplier. A personal visit yourself will work in your favor as well. Present your financial statements and the description of your prospects for success in your new business. Do not even consider inflating your financial statements to compensate for the lack of references. Not only is this a felony that it is also easily caught by most credit managers

However, do not be surprised if your supplier puts you on the cash on delivery basis for the first few months.

This helps the supplier get to know you better and establish your credibility as an honest business and a regular paymaster. It will also put the supplier on a safe footing in case your business has been based on unfounded prospects and projections.

Once the supplier is sure that your business is doing well and that you’re ordering merchandise on a regular basis, he would be more agreeable on issuing you a line of credit.

This creates a valid credit reference that you can present to new suppliers until the credit agencies accumulate enough data on your business for it to have its own credit history. Most suppliers operate on trade credit basis with businesses which means that once you are billed for a product or service you are given a certain grace period before the payment is due which is typically 30 to 60 days. During this time the supplier does not charge interest. Carefully consider all discounts and allowances before deciding whether to buy an item. Take into account what the financial cost of any item will be and what profit margin you can expect to make on the item.

dealing with business supliers

The most common of discounts are given for prompt payment and for payment in cash. Whenever you are able and whenever it is important, make sure you specify how the goods are to be shipped. You can even control the method of shipping to reduce your overhead costs by choosing the least expensive shipping method.

Suppliers also sometimes offer discounts to businesses for buying in quantity as freight allowance for a specific amount of merchandise purchase. Some suppliers pay an increasing percentage of the freight bill as the size of the businesses orders increase. Some may cover the entire shipping cost for purchase over the minimum amount.

Free shipping has become a sought after incentive for both businesses and retailers. You’ll find many online stores offering free shipping on a certain amount of order. Be aware of the fact that your shipping freight can equal more than 10% of your merchandise if the supplier happens to be located quite far from the business.

Make sure that you find out the suppliers freight policy as well as his charges before. Make sure that the order is large enough to warrant the delivery charge. Once you have established a sales pattern and know how much inventory you require, try to order in bulk, reduce the number of orders you have to place and save on the freight charges.

If the manufacturer or the supplier does not take back orders you might consider cancelling a backorder and adding it to the next village. One good source for finding suppliers is, www.thomasnet.com. This is a comprehensive online directory that lists manufacturers by categories it and geographic area.

Get to know how your supplier works and how they deal with orders. Do they use any particular system such as first in first out or we give priority to larger orders while customers with smaller orders have to wait.

Also, do they have other important clients that get a higher priority than you and how will the suppliers handle a shortage. Will your business have to wait till orders for its more important clients are fulfilled. Many businesses also specify a cancellation date of the orders which means they if the goods get delayed in shipping, goods shipped after a particular date will be returned to the supplier. By specifying a cutoff date you can increase the chances that your orders are shipped promptly and arrive in time.

When the shipment arrives at a business location, make sure there is someone there to check the basics such as the correct amount and type of merchandise received. Make sure that you have an understanding with the supplier that you would take the next couple of days to check the merchandise more thoroughly and to ensure that the quality matches the sample and that’s the supplier will address any issues that crop up during this examination.

How To Find And Deal With Business Suppliers

dealing with business suppliers

Finding Suppliers For A Business

Retail businesses depend upon suppliers. Depending upon the scale of your business and your inventory selection, you may make do with just a few or need many dozens of suppliers and vendors. If your business has been running for some time and is a popular one, you will get leads from sales representatives of various suppliers. However, if you’re just starting out, you will need to make effort to locate them yourself at trade shows, wholesale showrooms and conventions, through buyers directories, industry contacts, the business-to-business Yellow Pages and trade journals and websites.

Supplier can be divided into four general categories.

Manufacturers

Buying directly from manufacturers is usually cheapest. Most retailers try to buy from independent representatives or companies salespeople who handle the merchandise from different manufacturers. The only reason why buying from a manufactured may be cost prohibitive is if the location of the manufacture makes shipping freight expensive.

Distributors

Distributors are also known as wholesalers, brokers or jobbers who buy in quantity from several manufacturers and store the goods for sale to retailers in their own warehouses. Although all the wholesalers will include their profit margin before selling the merchandise you, the advantage of buying from a wholesaler can be that they have a variety of merchandise available in one place from many different manufacturers.

They may be able to fulfill their business needs in case you do not wish to place a very large orders. Some manufacturers refuse to fill small orders because they don’t consider it worth their time and effort. Also, if the wholesaler happens to be closer by than the manufacturer, the amount of money that is saved and quicker delivery times can often compensate for higher product costs.

Independent Craft People

Many independent craftspeople sell and supply their own goods either through representatives or trade shows.

Import Sources

There are some people who operate like wholesalers but instead of picking up merchandise from local and national manufacturers, they import and buy foreign goods. You can use these domestic importers who operate much like a domestic wholesalers to purchase merchandise for your business. You may even consider traveling traveling overseas yourself once you get familiar enough with the product and are is comfortable with making such business trips. Once again, approaching foreign manufacturers and suppliers yourself instead of through an importer will help you save money on the cost per item.

How To Deal With Business Suppliers

Building a relationship with your suppliers can be a key factor in the success of your business. Reliability is one of the chief factors that a business looks at when finding a supplier.

Having a long-term, financially sound relationship with a supplier means that they can help you out during the times when business goes through a rough patch itself.

When you are initially trying to build a relationship with the supplier, remember that you need to be professional and reasonable in your dealings with them.

If you argue and harangue them over every amount, every bill and ask them to shave the prices of everything that they sell you, fail to pay the bills promptly, don’t be surprise if that relationship ends quickly. After all, suppliers are also in business to make money.

If you’re a business start up, you cannot expect to get the same kind of attention and priority as other long standing businesses who have been regular clients of the supplier.

The intention should be to build your credibility and develop a good working relationship that shows your reliability on a long-term basis. Once you have built your own importance and priority with a good supplier, you will be happy to learn that it is one of the relationships that will prove to be profitable for both you and your suppliers.

Once you have compiled a list of possible suppliers, you should ask for quotes, proposals, complete with prices, available discounts, delivery terms and other important factors.

Do not just consider the terms but also investigate the supplier’s financial condition and reputation as well.

Ask them for references of their existing customers and call these customers to find out how well the supplier has performed. Every kind of business process and relationship has some problems at one point of time of year.

The important factor is how these problems have been resolved. This is true for relationship between the supplier and business as well. When you ask existing customers about the supplier, try to learn how the supplier handled problems and how helpful and co-operative he was in resolving the problem.

The attitude that you take with your supplier is likely to be returned in kind. Be honest, courteous and firm with your suppliers.

Give them a clear picture of what you need and when you need it. Have a good understanding of the total cost and make sure you clarified all important factors such as time of delivery clearly to the supplier. Keep in constant communication with your suppliers to fend off possible delays, potential substitution for materials, product quality, for improvements or new product introductions and potential savings.

Be prepared for certain conditions that many suppliers lay down specially for startup businesses and for new business relationship.

Suppliers can often establish a minimum order for merchandise which may be higher for the first orders to cover the cost of setting up a new store account. Some suppliers may also demand a minimum number of items per order.

Basics Of Maintaining Inventory

inventory management basics

Typically, when you have been in business for some time, your inventory tracking system should be able to tell you when to buy, what to buy and how much to buy.

For business startup, this projection gets to be a little difficult because you don’t have any previous sales figures to base your sales expectation on.

The amount of money that is budgeted to purchase inventory for a certain period of time which could be one month, two months or four months, is known as open to buy. The open to buy amount is calculated by using the following formula.

Planned inventory $20,000 plus planned sales $20,000 which equals $40,000 from this you reduce the actual inventory minus $15,000 as well as the stock that has already been ordered mine is $10,000 in. This gives you the open to buy amount of which equals to $15,000.

Apart from calculating the open to buy amount on a regular basis, many businesses dealing in seasonal products also figure in the season variations to accommodate seasonal sales fluctuations.

Even if your business is not a season one, most of the businesses experience some sort of fluctuation, most often an increase, in the sales of their merchandise during on season times such as during holiday season.

In these circumstances, it is recommended that you do not restrict yourself to the open to buy amount and consider going beyond the budget or use less than the entire amount. In fact, if your business anticipates to sell non-regular items during the season, you can reduce the open by amount for the regular merchandise to accommodate un-anticipated items and sales.

For the business startup that does not have existing sales figure 2 calculate exact amounts, the business plan should be able to guide you towards calculating the open to buy amount.

The business plan should help you calculate the gross sales that you need to pay to keep the business afloat as well as other overhead costs. Your business plan should give you a realistic idea of the basic stock levels and the monthly or season sale volumes need to have during the startup. Once you have been in business for several months, your inventory tracking system will provide this information for you.

Trade shows are great opportunity to show off your products and business to the public, consumers as well as finding potential suppliers.

It also presents you with the opportunity to evaluate your competition. They can be a great place to develop networking which will serve your business in the future when you need to expand or diversify. To find a trade show in your area, visit the trade show news, www.tsnn.com which is an online directory of more than 17,500 trade shows and conferences.

Accounting For Inventory – FIFO and LIFO Methods

Fifo lifo system of managing inventory

Every business owner should understand how the basics of accounting for inventory takes place. Although you will probably not be able to go through these calculations accurately without the help of a business account, you should be aware of the two basic methods that are used to calculate the value of inventory. Evaluating inventory for the business can be a complicated and complex process. These are the two basic methods used for for inventory accounting are LIFO (Last In First Out) and FIFO (First In First Out).

LIFO, Last in First Out. This accounting method values the inventory on the cost and price of the merchandise that is the newest. This form of accounting and calculating the worth of an inventory was brought into place when inflation became common. Under this system, the merchandise that is the newest and received most recently by the business is sold first. For example, let us say you purchased a business product that the value of $30 for unit last year. You again purchased this same merchandise this year but then the price had gone up to $50 per unit. Under the LIFO method, the merchandise that you purchase this year at a cost of $50 per unit will be sold first.

FIFO, under this method the inventory is valued against the oldest product in the stock. This was traditionally the method used by most businesses to account for inventory and to calculate its value. This method was common before inflation became commonplace.  So taking the same example as above, your entire merchandise inventory would be valued at $30 a unit because that is the price of the oldest unit in your stock. This method has a way of confusing accounting figures when there is inflation. Since there is a huge difference in the price of the merchandise from last year today, the evaluation of the inventory can be misleading. Under FIFO for system, the merchandise that was received first is sold first.

Your business can follow either of these methods depending upon the nature of your business product and what suits your business more. You can use the both dollar system or the unit system to calculate inventory value.

How To Increase Profit By Increasing Inventory Turnover

good inventory turnover

What is Inventory Turnover, How it Affects Business Profit, How to Increase Inventory Turnover

It is a commonly acknowledged fact that by reducing the time that it takes to turn over the inventory for your business, you can increase the earning potential and profit as well. The business is considered to have turned over its inventory when it has replaced 100% of the original inventory. Important factor to be considered when maintaining your inventory and business stock is calculating the needs time.

The needs time is calculated by adding the count cycle plus order cycle plus delivery cycle. The count cycle is the time after which you decide to count your inventory. Order cycle it is the time that it takes you to finish the counting, process the paperwork and place the order with the supplier. The delivery cycle is the time that it takes for the fresh inventory to reach your business.

So considering an example where you count your inventory every six weeks and it takes you one week to finish counting and placing the order, your count and order cycle are six and one week respectively. If it takes further three weeks for the inventory to reach your business, the delivery cycle is three weeks. Adding these three figures you get a total cycle of 10 weeks which is your needs period.

Assuming that you sell 10 units every week, you will need to order fresh inventory by multiplying 10 into 10 which comes to 100 weeks in advance so as not to fall short in the middle of the sales. You need 10 weeks worth of inventory from the first day of the count cycle to sustain business until fresh merchandise arrives.

Now most businesses believe that if they can manage to turn over their inventory faster, they can enhance their profits. Presuming that the demand exists for the business product.

Turning over the inventory quicker means that you sell more business merchandise. This automatically means that your business makes more profit.

You can improve your inventory turnover by doing a few things yourself and working in a more streamlined manner with your distributors. For example, you can begin to count inventory every three weeks rather than every six. You could work with your distributors and suppliers to find more efficient ways of shipping merchandise to your business to reduce the time it takes for the delivery cycle. If you can achieve both these things and cut both these time periods by half, you could increase your inventory turnover by doubling it and therefore doubling the business sales as well.

Another way to look at the inventory turnover is by measuring sales per square foot. This method is not just helpful in calculating your inventory turnover but also in calculating the cost of storing and maintaining your inventory.

You take the average retail value of the inventory and divide it by the number of square feet devoted to a product. This gives you the average sales per square foot. You will be able to calculate how many sales per square foot per year you need to break even with the cost of running the business. You should calculate your sales per square foot once a month to make sure that all calculations are according to your expectations.

Knowing the cost of inventory per square foot also helps you measure the cost of storing the stock in godown and warehouses. This lets you control the amount of inventory you want to stalk by reducing excess inventory.

How to Choose a POS Tracking System

pos tracking systems

Features that you may consider in order to choose the right POS tracking system.

Ease of use

Make sure that the interface of the BeOS tracking system that you choose is something that you understand and are comfortable working with.

Some prefer a detailed interface whereas other people prefer the option of being able to bring up a user-friendly graphical interface. Preferably, the POS system should allow you to switch between the 2 as per your requirement.

Entry of sales information

Most of the POS tracking systems that you use will allow you to use some way of inputting inventory codes either manually or in the form of bar codes through a barcode scanner.

This not only helps you keeping track of inventory but also makes a checkout process more streamlined for your customers. Putting in the inventory code manually or automatically will bring up information like the sales price, provisional discounts, volume discounts and any other related information that will help in faster checkout process.

Pricing

POS systems will provide usually a variety of ways to keep track of pricing, including add-on amounts and custom formulas. This allows you to set up multiple prices for each item depending upon the circumstance that it is being sold under.

Updating product information

The POS tracking systems are capable of automatically updating the inventory and accounts receivables once the sale is made. This is one of the biggest advocates of using a POS tracking system and why it is sought after for cash flow management and inventory management.

Sales tracking options

Different businesses have different ways of conducting sales and consequently different ways of getting paid. A repair order service shop may keep the invoices open till the time the work is completed. So they need a system that allows to put the sales of food. Similarly a business that offers sales on installment would do well by implementing POS system that tabulates monthly payment and interest.

Security

An effective POS system helps you maintain control over cash receipts and prevent theft by providing audit trails so you can trace any problem quickly.

Taxes

Many POS systems can support numerous tax rates which is helpful if you are shipping to more than one state with different tax rates.

 

Computerized inventory tracking systems

Most of the businesses find it much more useful to implement some sort of a computerized and automated system to keeping track of their inventory and stock.

To start with, manual inventory taking takes up too much of time and physical effort.

Instead of having to constantly update the inventory count on a daily, weekly or monthly basis the computerized system can help you integrate your sales with the inventory count.

This means that every time that the sales occur, automatically the inventory gets updated. This is commonly known as POS, point-of-sale inventory tracking system. However, even if you’re using simple desktop inventory tracking software like Inflow, your effort is going to be greatly reduced and you will be able to analyze more information automatically.

Softwares are capable of analyzing the data that you input and generate many kinds of reports that tell you more about which are the higher profit-making products, when to order fresh inventory and also let you track usage, monitor changes in the unit cost and calculate when you need to resize your inventory level.

Because a computerized inventory tracking system helps you save time, you can devote more effort towards managing your business profitability.

Benefits of Using a POS Inventory Tracking System

By using a point-of-sale, POS inventory tracking system, you can:

  • Analyze sales data and calculate how well the various products are doing. This allows you to adjust your inventory purchasing by concentrating more on the highest selling products.
  • A POS inventory tracking system helps you keep the sales history which lets you see the trends in your sales over a long period of time. This helps you to gear up and prepare in advance by keeping additional stock and inventory for the on season purchasing trends.
  • POS systems allow you to integrate various sales tools such as barcode scanners, credit card processing, cash registers which makes your checkout process more streamlined.
  • There are plenty of options for a POS tracking system that enables you to use add-on devices that you checkout stations such as electronic cash drawers, credit card readers, receipt or invoice printers. The POS package frequently comes integrated with accounting modules such as general ledger, Accounts Receivable, Accounts Payable, purchasing, inventory control systems. Not only is the POS system good way to track your inventory is also very effective in keeping track on the business cash flow.

What Is Radiofrequency Identification, RFID

Radio Frequency Identification RFID

Radio frequency identification, RFID is a method of tagging products that helps in various business processes like inventory tracking, sales checkout, asset tracking, loss prevention and stock management.

Until now, RFID and technology is considered to be the domain of mainly large businesses. However, since the cost is the only restricting factor for small businesses, the potential for small businesses to use this technology is growing with the passage of time because the overall cost is coming down.

In order to use radio frequency identification, RFID, smart tags are fixed to individual products or to the pallets of merchandise. These tags are capable of absorbing and reflecting radio waves that can be read by an RFID scanner.

The nature of this technology allows a huge range of information to be stored on the tag such as the date of manufacture, date of shipment, price, contents and much much more.

One of the sought-after features of radio frequency identification, RFID is that it allows for a completely automated checkout in stores.

Using the magnetic tag on the various products RFID scanner can scan an entire cartload without the need to scan each different product during checkout. Customers can simply walk past the scanner and have their total ready for payment. Similarly, when RFID tagged merchandise is received by a business from the supplier, they can be easily scanned in bulk and the information automatically updated in the inventory tracking software. This is of great use for larger retail stores.

This technology is becoming so popular that large retailers like target and Walmart and even government agencies like the Department of Defense require RFID tagged merchandise from the suppliers.

How Inventory Turnover Affects Business Profit

Inventory turnover and business  profits

It is a commonly acknowledged fact that by reducing the time that it takes to turn over the inventory for your business, you can increase the earning potential and profit as well.

The business is considered to have turned over its inventory when it has replaced 100% of the original inventory. Important factor to be considered when maintaining your inventory and business stock is calculating the needs time.

The needs time is calculated by adding the count cycle plus order cycle plus delivery cycle.

The count cycle is the time after which you decide to count your inventory. Order cycle it is the time that it takes you to finish the counting, process the paperwork and place the order with the supplier. The delivery cycle is the time that it takes for the fresh inventory to reach your business. So considering an example where you count your inventory every six weeks and it takes you one week to finish counting and placing the order, your count and order cycle are six and one week respectively.

If it takes further three weeks for the inventory to reach your business, the delivery cycle is three weeks. Adding these three figures you get a total cycle of 10 weeks which is your needs period. Assuming that you sell 10 units every week, you will need to order fresh inventory by multiplying 10 into 10 which comes to 100 weeks in advance so as not to fall short in the middle of the sales.

You need 10 weeks worth of inventory from the first day of the count cycle to sustain business until fresh merchandise arrives.

Now most businesses believe that if they can manage to turn over their inventory faster, they can enhance their profits. Presuming that the demand exists for the business product.

Turning over the inventory quicker means that you sell more business merchandise. This automatically means that your business makes more profit. You can improve your inventory turnover by doing a few things yourself and working in a more streamlined manner with your distributors. For example, you can begin to count inventory every three weeks rather than every six. You could work with your distributors and suppliers to find more efficient ways of shipping merchandise to your business to reduce the time it takes for the delivery cycle.

If you can achieve both these things and cut both these time periods by half, you could increase your inventory turnover by doubling it and therefore doubling the business sales as well.

Another way to look at the inventory turnover is by measuring sales per square foot. This method is not just helpful in calculating your inventory turnover but also in calculating the cost of storing and maintaining your inventory.

You take the average retail value of the inventory and divide it by the number of square feet devoted to a product. This gives you the average sales per square foot. You will be able to calculate how many sales per square foot per year you need to break even with the cost of running the business. You should calculate your sales per square foot once a month to make sure that all calculations are according to your expectations.

Knowing the cost of inventory per square foot also helps you measure the cost of storing the stock in the godown and warehouses. This lets you control the amount of inventory you want to stalk by reducing excess inventory.

What Is Inventory Tracking – How Is It Done

what is inventory tracking

In order to implement inventory control and to manage your inventory in one way or the other, you need to have some sort of an inventory tracking system in place. An inventory tracking system helps you keep track of what has been sold, how much merchandise is in stock and how much you need to order and when.

And inventory tracking system comes in various sizes, forms and expense. But at the end of the day a good inventory tracking system helps you manage your stock and inventory effectively and lets you know several key driving factors for effective inventory management such as recognizing the fast-moving items, how much to reorder, when to reorder, amount of backup stock required, sales trends and more.

By using any one of the popular inventory software or by by devising a manual method such as tagging you can set up your own inventory checking system to keep track of your stock. However, it is most common for inventory tracking system to be set up with the guidance of an account.

An inventory tracking system can be simple manual system that uses a tag which is removed from the product at the time of sale, to the moderately sophisticated tracking system which uses a desktop tracking software such as Inflow, or a more sophisticated point-of-sale POS tracking system plugged other processes like with barcode tracking, credit card processing, cash register etc.

The kind of inventory system that you use for your business will largely depend on the scope and size of your business. Business of all shapes and sizes use entry tracking. From a one-man business to multinational businesses all use or rather should use some form of inventory tracking. A home-based business can devise a simple method of inventory tracking using tags, stickers and labels. The midrange business can implement automated tracking systems by using various software and even a POS point-of-sale system in integration with credit card machines, cash registers, a good tracking etc. A larger scale business can go in for technologies like magnetic tagging.

The scope of inventory tracking software is also very diverse. You get simple desktop software is which can be used on any personal computer to high-tech and complicated software that do a lot more like analyzing sales data, maintaining sales history, calculating taxes, generating special reports for sales per hour, creating multiple formats for invoices, accounting statements and generating the end gas reconciliation worksheets and inventory management reports.

The simplest example of of inventory tracking can be taken where a business uses the tag system to produce a monthly chart showing sales according to product line, brand and style. At the top of the chart the various products line are listed and from the left margin of various brand names and different styles. At the intersecting space in the table the number of items of each category are listed, that is, in what style and color the product was sold and whether there was any discount or a volume sale consideration given, along with any other relevant information.

Dollar control tracking systems show the cost and gross profit margin on individual inventory items. The basic method of the control begins at the cash register with the sales receipts listing the product, quantity sold and the price. You can compare sales receipts with margin on each item. Once again you can use software programs to track inventory by type, cost, volume and profit such as Inflow, www.Inflowinventory.com, AdvancePro, www.advanceware.net and Inventory Tracker for Manufacturing/Distribution, www.trackersystems.com.

Unit control systems use methods ranging from physically examining shelves to using sophisticated bin tickets and stickers get with each type of product that lists a stock number, a description, maximum and minimum quantity stopped, cost [in code], selling price and any other information that needs to be included. Bin tickets respond to an office file cards that list the stock number, selling price, cost, number of items to a case, supply source and alternative source, order dates, quantities and delivery time.

Retailers make physical inventory checks daily, weekly or as often as required by the business. Sometimes businesses assign one employee the responsibility for keeping track of a group of items. Bigger businesses hire stock personnel to organize and count stock.

Why Inventory Keeping Is Very Important

You will be surprised to learn how important inventory control is actually in the running of the business. Many entrepreneurs make the mistake of undermining the importance of maintaining and taking complete control of the inventory.

One simple way to look at it is this. What is a business without inventory? The answer is quite simply nothing. Without inventory you have nothing to sell and nothing to earn a profit on.

By analyzing, controlling, managing and understanding elementary, you can understand which are the fast-moving products and which ones on your maximum profit. 

It would be a grievous mistake to treat called categories of product that your business is as similar. They are always fast-moving products which generate a lot of profits as compared to other slower moving ones.

In fact the majority of the businesses realize that 80% of their revenue comes from 20% of the products. 

This is to say that you are in a business that deals with a variety of goods, products in different shapes and sizes, designs or any other kind of variation.

The products that generate the maximum profit do not necessarily have to be the ones that are the most highly priced. Sometimes also hotselling that smaller products with a less profit margin they overtake the more expensive business products.

Some experts go as far as to say that the business can typically increase their profits by 20% to 50% are implementing good inventory control.

Inventory control does not simply mean counting breathtaking physical control, managing it, keeping track of what is selling and what needs to be added and even locking it up quizzically, restricting access and treating it as one of the most valuable assets of a business. After all the inventory of your business product is the real cash value of your business sales.

Many entrepreneurs are hesitant to implement inventory control on their business because they lack the proper knowledge about how to do it. 

In order to track their inventory you need a system in place which is either manual, automated and software driven

Mostly, your business accountant can help you in doing this. A manual system or one that uses software and other more technological approaches such as barcode tagging, magnetic tagging all serve the purpose equally well as long as it meets your business scale and need and allows you to control your stock and inventory effectively.

Remember if your business hinges on, purchasing and reselling products, not having good management on your stock and inventory could mean that you end up purchasing larger quantities of items that you should not. 

It may also mean that you end up maintaining a higher or lower amount of inventory either of which can cost you business money and profit.

How Inventory and Stock Affect Cash Flow

affect of inventory on cash flow

Relationship between Inventory and Cash Flow Control

As we have briefly mentioned in the previous post, your stock and inventory has a direct effect on cash flow of your business.

You will be well aware of the fact that the cash flow is an essential factor that any business depends on for running smoothly. Any problem with the cash flow and suddenly a business starts having many different problems. Cash flow problems quickly translate into more serious problems for the business. Which is why problems in the cash flow is considered to be one of the foremost and important signs that the business might be in trouble. Problems in the cash flow can predict future problems for the business.

If you buy excess inventory, you are locking up a larger chunk of your business capital.

This money stays blocked and unavailable to other running expenses and departments of the business till the stock is not sold. If you keep excess inventory on a regular basis, the cash flow problem can quickly compound and become serious.

We have also mentioned the 18–20 rule when it comes to maintaining stock. Most successful businesses know that over 70% of the project is likely to come from just 20% of the products.

Most of the experts agree on this. It would be a mistake to treat all your business products in a similar fashion. It is a better idea to categorize them in different categories of turnover rate. An inexperienced entrepreneur may have the instinct of giving more importance to the more expensive items in the inventory. However, the more expensive product in your business catalog may not necessarily be the most profit-making one. It is common for product with a lower dollar value and a lower profit margin to affect the business profit bottom line more than the expensive products, simply because the turnover is high and the product is a fast moving one, meaning to say, simply, that it sells more.

If you can segregate inventory according to turnover rate, you can allocate more resources to the products that generate more profit whereas keeping balance outlook on the other categories.

Most of the businesses follow this approach where they concentrate on higher turn over products more and maintain an even keel on others.

It is also advisable to maintain your inventory in such a manner that you keep a smaller number of items in stock for a short period of time rather than a larger number of items for longer period of time.

In order to achieve this you may consider ordering smaller quantities of stock but more frequently.