Poor stock controls can lead to cash flow problems and even to business collapse, which is why you need to manage stock levels closely.
Stock is raw material, work in progress and finished products you hold and intend to sell to generate revenue. Some businesses such as professional services don’t need much stock.
Having stock costs you money, unless you are in the unusual and enviable position of being able to sell it before you have paid for it. If you have an overdraft charging 10 percent interest and you carry $10,000 more stock than you need, it will cost you $1,000 a year. Excess stock also reduces the money you have available to pay bills.
Look around your premises – is there stock gathering dust in a dark corner? If you have excess stock, there are options besides having a ‘clearance sale’. Some suppliers may take back excess stock, especially if you have a good relationship.
How do you get stock levels right? Have options to order new stock quickly and only keep items your customers need right away. It is tempting to hold stock just in case a customer wants something but apply the 80/20 rule. If 80% of profits come from 20% of what you sell, then focus on that 20% of stock.
Hold less in quieter periods. Balance these savings of discounted large orders against the cost of holding stock. Ask for longer payment terms from suppliers to help reduce the cost of holding stock.
Use your accounting software or your accountant to regularly produce data on the ‘age’ of your stock A simple ratio is called Stock Turnover – the cost of goods sold for the period divided by the average of opening and closing stock for the period. The figure will move around so focus on the trend over time. The higher the number the faster (better) you turnover your stock.
Greg Taylor is Chief Financial Officer for the Hunter-based Greater Building Society. This article appeared in the Newcastle Post May 30.