Tag Archives: small business

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.

What’s the difference…?

Recently I was at a networking lunch where I was asked why a business would use my services instead of relying on their usual accountant.

It’s clear from the number of accountants who have introduced me to their clients that I’m not their competition. I don’t replace the services that a traditional accountant offers; I work alongside them to improve the information they have to work with and help their clients understand the figures.

The first thing to recognise is that a large number of businesses don’t need my help.

A lot of businesses follow quite a simple model; they buy in goods, add a set margin and sell on. (Simple doesn’t mean easy; it’s just not difficult to understand) There’s a few accounting jobs there that have to be got right but so long as the margin is right, and costs are kept under control the business will run successfully using the standard accounting reports.

The same applies to established businesses who understand what makes them profits. If doing what they’ve always done works for them, then they don’t need my help. (I’m happy to work with them, but they probably don’t feel the need.)

So which businesses does that leave?

I specialise in helping food manufacturing businesses where working out the cost of the product is more complicated and where making one key product creates a number of other products which are often less profitable or harder to sell.

In these sorts of cases the answers that business owners need doesn’t come from analysing the year end accounts differently, or from producing the accounts more often. The figures required come from changing what you measure in order to get information that shines a light on what’s happening inside the business.

– Does it matter how much the total gross margin is if you make a huge profit on one product, but lose most of it on the others? Questions that management accountants answer

– Would you be able to sell more units at a slightly lower price and actually increase your bottom line?

– What will happen to profit if you increase sales by gaining a new customer but need to employ more people and change your delivery method?

It’s all too easy to allow customer demand to dictate how a business grows, but if you have the right information you can make sure that the business is developing in the way that the owners and management want it to.

It’s when they want that kind of information, plus my experience of working in business, managing finance teams and understanding the accounting information that businesses come to me.