Tag Archives: Cashflow

Taking stock of the value of stock

One of the most common questions I find myself helping businesses to answer is “Where did all the money go?”

Even in the most profitable businesses it can sometimes feel as though there just isn’t enough cash to pay all the bills.

Usually (* but not always) the culprits are increasing customer debts and increased levels of stock. I posted a blog about debtors previously; basically the key is to know what you’re owed and make sure the customers pay.

Stock can be harder to pin down. It’s easy to see, but it takes time to keep track of exactly what you’ve got and unless you know for sure what’s in stock how can you be sure it’s what you need.

Surely having stock is good?
Stock is an asset of your business – goods held so that you can sell them at a later date.
The problem comes when you have already paid for the stock, or paid for the stock to be made.
Until you sell the stock you can’t get your money back.

So you could think of having stock being like having piles of money locked up in a warehouse.

But I need stock to be able to meet my customers’ orders…
That’s right you do need some stock, and some businesses need a lot of stock. The key thing is to make sure you don’t have too much stock.

There are two parts to this:
1. First the only accurate way to know what you’ve got in stock is to go find it, and count it, and repeat regularly.

This might be time consuming to start with, but usually the more you count stock the easier it gets. You’ll have better awareness of what you have in stock and where it is.

Initially all you really need to know is the quantity of stock that you’re holding, but to see the whole picture you need to know the value too.

Be realistic about this – you need to know how much you paid for the stock, and also how much you can sell it for.

2. Next you need to have a forecast of how much stock you’ll need.
Forecasts don’t predict the future, so there’s no need to get hung up in too much detail. How much stock do you need to cover the time it takes for replacement stock to be ready or delivered?

But it’s cheaper to buy in bulk…
Sometimes suppliers offer cheaper prices for bulk orders, but it’s only a bargain if you actually need all that stock!

A bigger problem can be where suppliers set a minimum quantity per order. Depending on what your forecast says you need it may be worth paying much more to buy just what you need from a different supplier.

So managing stock will help cash flow, but it won’t make me any more profit…

Actually I think it will:
– It’s likely that you will waste less because you know exactly what you’ve got and what you need
– You won’t need as much space for storage, and you won’t need to ensure the stock either.
– You won’t be paying interest on a bank loan (say) to fund all the cash you’ve got invested in the stock.
– There’s less chance that you might be left holding stock that you can’t sell, for any number of reasons – maybe your customer changes to a different supplier.

If my sales increase I’ll need more stock…
That’s true. What often happens is that when sales increase you end up with more cash tied up in debtors and stock, so life gets more difficult.

If 50% of your costs of sales are in raw materials, and you find a new customer who buys £10,000 per month then you will have to find £5,000 extra to cover the cost of additional stock purchases.

This is when you really need a plan – the extra cash flow or “working capital” that you need will have to come from somewhere and life is easier if you plan in advance.

In short, if your business holds stock you need to make sure that you’ve got good information to hand so that you’re looking after your investment.

Stand and Deliver!

If you’re in business the chances are you love sales.

Sales mean customers value your hard work, your innovation, your creativity – what’s not to love?!Cash is king for business

In the modern world very few businesses sell without offering credit to their customers. (If you’re a retailer who accepts cards then potentially someone else offers credit to your customers…)

In this case more sales are good but what you really need to focus on is more payments from customers.

One of the things I’ve noticed is that when businesses grow everything gets busier. It’s amazing how sales go up and all of a sudden customers take longer to pay. When you send out more invoices somehow more go missing in the post (*although this might just be an excuse for late payment…).

The result of this is that although you are busier, needing to buy more materials and pay more wages there may not be any more cash at hand to pay the bills.

So how do you manage customer credit? Here’s my action plan:

PREVENTION

Make sure you have chosen to offer credit to each customer, not just let them have the goods on a promise that they’ll pay later.

Do you know the customer? Have you done business with them before? It seems simple, but first impressions from a face to face meeting can tell you a lot about the customer.

Also take time to look at their business premises, does it look organised and well looked after?

Using credit applicationsYou probably have a new customer form to record delivery and contact addresses etc. It’s a good idea to include your standard payment terms (eg 30 days) and ask for trade references from existing suppliers.

Credit checks can also be helpful, and there are a huge number of different agencies who offer these services. However the best option is to make the decision based on your own impressions.

UP TO DATE

This is the number one thing about accounts – you can only make good decisions if your information is up to date. It’s worth paying for a book keeping service to make sure that you can rely on your accounts.

INFORMATION

Once you’ve offered credit to customers and your accounts are up to date you need to keep track of who owes what:
– How much do they owe?
– When did they last pay?
– Are they buying regularly but not paying regularly?
– Have they been buying regularly and then stopped, without paying what they owe?
– Are there some invoices which seem to have been overlooked for payment? (Maybe they have genuinely been lost in the post?)

Don’t let issues go unchecked. Maybe this seems arduous, but this information should mostly come from your book keeper/ accounting software.

COMMUNICATION

It’s important to share some of your information with your customers.
– Send out statements regularly, at least once a month.
– Send copies of old invoices if they appear to have been overlooked, email makes this really easy.

If it’s proving difficult to get money out of certain customers you need to rely on the personal relationship we discussed before. Phone contact is usually more effective than letters, it is harder to ignore.Keep up phone contact with customers

On the phone, be realistic. Being rude might get you paid this time, but will probably not keep the customer in the longer term.
Ask what the situation is, is there a problem? Try to respond creatively to what you’re told – if bills are paid on a certain day of the month you could work around that. If there’s a hold up due to a delay in your customer’s customer paying you could take that into account.

Do keep a record of your conversations though; do you always get the same excuses or the same promises? If you end up needing to consult a solicitor because you can’t get the customer to pay you will need to have a record of what you have done to try to recover the debt, but this is the very worst case scenario. Cash is king

It really is worthwhile thinking about your process for keeping track of customer credit – you’ve already done all the hard work to find the customer and make the sale so getting the payment is the final piece of the jigsaw.