What is Inventory Cash Flow?

What is Inventory Turnover?

Inventory turnover is the amount of times your business sells inventory and replenishes it within a certain period of time. An important metric for brands is the inventory turnover ratio, which measures how fast your business sells inventory and therefore turns it into cash, indicating positive or negative business performance. If the ratio is low, then sales are often slow and the business is likely overstocked on inventory. A high ratio means inceased sales, but inventory shortages likely exist.

The speed at which a brand can turn over inventory is crucial for measuring business performance. Holding inventory for too long is costly and hinders businesses to stock up on products that sell faster, hence creating an opportunity cost as well.

To calculate your brand’s inventory turnover ratio, divide the cost of goods sold (COGS) by the average value of the inventory of any given period.

Inventory Cash Flow Statements

Inventory is a current asset, and therefore has an impact on your business’ cash flow statement and also appears on your balance sheet. When you buy inventory, you spend money on acquiring it, and therefore cash flows out of your business. This is also true when you sell products (which is inventory) and cash flows back into the company.

What’s important is that brands stay up to date with their cash flow statements and make sure that liquidity isn’t compromised due to poorly managed inventory.

The Cost of Poor Inventory Cash Management

If you purchase too much inventory and don’t sell products, you will acquire costs for holding the inventory, among other issues. Inventory management means having the right inventory in the right place at the right time. Good inventory management reduces excess stock, increases sales and keeps customers happy. All of these factors are directly tied to your business’ profitability. It is not uncommon that poorly managed inventory leads to:

Lost Customers: Too little inventory and stock outs lead to customers seeking out the competition if they cannot get their hands on your products. This can lead to losing customers entirely in addition to a damaged reputation in the market. Managing inventory the right way ensures that customers’ demand is consistently met by selling them products they want.

Reduced Sales: When there is too much inventory that you cannot turn into cash, you lose out on sales because you are passing on the opportunity to keep more of those items in stock that do sell well. Successfully managing your inventory helps you allocate money towards keeping those fly-off-the-shelves items in stock, which enables you to increase sales.

Excess Stock:  Lots of inventory that hasn’t moved in a while means your brand is holding inventory that is not selling consistently, which negatively affects cash flow. It is important to keep just the right amount of inventory on hand and to avoid excess stock. Inventory management helps reduce excess stock, which leads to lower costs for the company.

Reduced Working Capital: Buying lots of inventory means putting many of your dollars into products you have yet to sell. This decreases working capital and takes away cash that you could use to keep other areas of your business running smoothly.

4 Tips to Manage Inventory & Cash Flow

1. Track Inventory

By implementing an inventory tracking system that utilizes real-time data, you gain insight on when to restock and at which quantities. This is especially important when you are a seasonal business or want to know which products sell more than expected, so you can restock your shelves right on time.

2. Right Size Inventory

Setting yourself up with the right inventory amount can help your brand turn those assets into cash quickly and increase turnover. You also save money by not renting unproportionately large inventory real estate by planning ahead. The cash you save can be used for short-term expenses, launching new products, and more.

3. Avoid Large, Infrequent Orders

Large and infrequent inventory orders should be avoided, since they increase the likelihood of having to hold too much inventory.  By ordering too much and putting too much money into inventory at once, cash flow can quickly deteriorate. The longer that inventory is held, the higher are the costs to do so, besides the opportunity cost of giving up on the chance to sell more profitable products.

4. Plan Ahead

Businesses need to understand their products, customers and suppliers. Getting a good understanding of demand trends by looking at historical sales data for certain items can help brands plan ahead and increase sales. Reducing excess stock and quantifying as well as prioritizing opportunities can help brands plan better and make more strategic decisions when handling inventory.

Get Help with Inventory Financing from Assembled Brands!

Managing inventory is an important aspect of doing business as it has a direct impact on your cash flow. Brands should strive to keep optimal inventory levels. When cash flow is tight, options like inventory financing can be a great way to relieve some of the stress of not knowing if there will be enough inventory for an upcoming busy season.