How to improve cash flow by managing stock effectively

Paul Meades, MD of accountancy and business development firm Meades & Company, outlines the importance of managing your stock correctly and the impact it can have on your cash flow.

Efficient inventory management might seem like a daunting task. Stocking the right products, making sure you’ve got the correct stock levels and a plan on what to do with items that you don’t sell, or indeed what new lines you want to sell, are all common concerns.

Treat your stock like an investment

Put simply, stock management is as important as running your business bank account and should be treated with the same level of care and attention.

For example, if you reconcile your bank account weekly or monthly, do the same with your stock records. This way you will keep on top of items that you have left in stock and those that require reordering, and when. An efficiently managed stock control system is guaranteed to have a positive impact on your cash flow.

Depending on the type of business you own it can be important to understand the average number of days you will hold stock for before selling it. For example, for a restaurant this would probably be no more than two to three days, since the food would go off if stored for longer.

To calculate how many days’ worth of stock you have:

For example:

Keep stock control simple

The philosophy of ‘the bigger, the range the better’ has been disproven time and time again. ‘Ramsay’s Kitchen Nightmares’ is a prime example of poor stock management and its subsequent knock-on effect. Overly complicated menus showed stock levels running out of control. By focusing on quality rather than quantity, Ramsay taught restaurateurs how to implement efficient stock management and how it impacts on both cash flow and the future of their business.

Analyse your business data

Your own sales data can provide valuable information to help you understand patterns such as seasonal trends and peak trading times. This can help you plan ahead for busy periods or buy in seasonal stock to make sure you’re not left short.