Tag Archives: Planning

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.

It’s all about the money, honey

If you’re in business the chances are that you need to make money.

The aim of the game is to have something left after all the bills are paid whether that’s because you want something for yourself, to pay dividends to investors or, if you run a social enterprise, to do some good for the wider community.

Cash in business Quite often I hear the complaint “We’re not making any money” but what does this mean? There is no point in any business at which money is actually made!

In simple terms we think of “making money” as making profit – when sales income is more than all the appropriate costs.

What people actually mean when they say they are “making money” is that there is plenty money in the bank to pay the bills that come in. Making profit doesn’t always mean that there is money in the bank.

In business nowadays the chances are you buy on credit, and you offer credit to your customers and you buy more stock that you need straight away so that you always have something to sell. All these things separate when the money is received (or paid) from when the sale actually happens.

So making money is actually more to do with generating cash.

Cash is king for businessIn basic terms, a business which consistently makes losses will only be able to pay all of its bills if there is extra cash being provided from somewhere else. If my costs come to £5,000 but my sales are only £4,500 I won’t be able to pay all of my bills, there will need to be a bit of negotiation with suppliers or some savings to fall back on.

However making money isn’t simple even if the business is making profit.

It’s possible that I could be making profits and still not bringing in enough cash to pay all the bills when they are due.

Most obviously, if I buy stock for selling on in future I will likely need to pay my supplier for the stock before my customer has paid me, but if my customer hasn’t paid me how can I pay anyone else?

Accountants usually make some changes on paper to spread these sorts of costs over the year and match them to the sales that they relate to, but in cash terms my suppliers need the money more promptly to pass on to their suppliers.

What’s even more tricky is finding cash to invest in the business’ facilities. Buying a new delivery van has very little impact how much profit you make because only a small-ish part of the cost of the van relates to the sales in any given month, or year.

When it comes to paying for the van though, even with a hire purchase loan you’re going to need to pay a chunk of the cost as a deposit. That’s going to hit the bank balance.

So making money involves more than just selling for a profit. Cash may be king, but cashflow is complicated!

In my view the only way to tackle the cash challenges that every business faces is to plan ahead. Add to that a bit of action to make sure that:
– customers are paying,
– you’re not paying out for more stock than you need and
– you are making the best use of credit offered by suppliers
and you will be giving yourself the best chance to make money (and hold on to some of it) whatever stage your business is at.

Cash is kingThis is the first in a series of blogs looking at cash flow and ways to improve it, all filed under the “Cash is King” category.