Want to grow your business without running out of cash?
Entrepreneurs everywhere know this dilemma all too well. You need inventory in order to generate revenue… However, every dollar invested in inventory is a dollar not being spent on wages, vendors or your next investment opportunity.
Here’s the problem:
Tip too much into work, and your business grinds to a halt – even when it looks like sales are good on paper.
Let’s jump in!
In this guide:
- Why Cash Flow & Inventory Are Always At War
- The Real Cost Of Getting The Balance Wrong
- How Supply Chain Planning Fixes The Problem
- 5x Practical Ways To Strike The Right Balance
Why Cash Flow & Inventory Are Always At War
Inventory and cash flow are two sides of the same coin.
Inventory is necessary to fill orders and increase sales. The second you purchase inventory, your cash disappears. Now it’s just sitting there on a shelf waiting to be sold.
For a growing business, this creates a constant problem. You want to:
- Order more stock to meet demand
- Keep enough cash for payroll, rent, and bills
- Have spare cash to invest in growth
But you can’t do all 3 at once.
This is where intelligent supply chain planning steps in. Advanced demand planning solutions allow you to forecast exactly what you need to order, when you need it, and how much working capital you’ll require. Without supply chain planning you’re left with too much inventory or none at all when you need it most.
There’s numbers that prove it. $1.7 trillion sits trapped in unnecessary working capital in the US’s top 1,000 companies. Money that could be driving growth just sitting in your warehouses.
The Real Cost Of Getting The Balance Wrong
Most business owners don’t realise just how dangerous this balancing act can be.
Here’s the breakdown:
Excess inventory ties up your cash. You can’t pay your bills. You miss discounts from suppliers. You can’t invest in advertising.
What happens when you understock? Sales are lost. Shoppers leave and don’t come back. Customers complain.
Both extremes hurt your business — just in different ways.
Here’s a fun fact for you: 82% of small businesses fail due to cash flow issues. Not because they offered a poo product or service. They just ran out of cash.
And inventory is one of the biggest culprits…
Think about it:
Say you have $200,000 in stock that you cannot sell for 6 months. You have $200,000 that is unavailable to grow your business. Sounds successful right? You are profitable on paper but cash-poor in reality. That’s why most “successful” businesses go out of business.
FYI: Cash flow problems are multiplied for seasonal businesses. Order too much before a slow season and you may be left with dead stock for months.
How Supply Chain Planning Fixes The Problem
The good news? You don’t have to guess anymore.
Effective supply chain planning allows you to plan for demand so you purchase only what you need. This enables you to have enough stock to satisfy demand without locking up too much cash.
How does it work? Because rather than going with your gut feeling, you are utilizing actual data to make informed decisions about:
- How much stock to hold
- When to reorder
- Which products to focus on
- Which products to phase out
This approach helps you stop spending money on slow-moving inventory. Instead, that cash gets reinvested into your fastest sellers. Which means you’ll sell more. Collect more cash. Grow bigger.
5x Practical Ways To Strike The Right Balance
Want to balance cash flow and inventory? Here are 5 Easy Tips to scale without running out of money.
Forecast Demand Properly
Forecasting is key to effective cash flow management. If you don’t know what you need you will always over-order or under-order. Base your forecasts on your historical sales figures. Consider:
- Past sales trends
- Seasonal patterns
- Market changes
- Upcoming promotions
The better your forecast, the less cash you’ll waste on the wrong stock.
Watch Your Slow-Movers Closely
Slow-moving inventory is death to cash flow. Spot inventory that’s been sitting too long. And then determine what you will do with them:
- Run a promotion to clear them
- Bundle them with best-sellers
- Return them to suppliers (if possible)
- Stop ordering them
Dead stock gets more expensive the longer you keep it.
Build Strong Supplier Relationships
Your suppliers may be your best friends when it comes to cash flow. Maintaining a healthy supplier relationship earns you some flexibility. You can:
- Negotiate longer payment terms
- Get smaller, more frequent deliveries
- Access bulk discounts when needed
- Return excess stock
Fewer dollars invested in inventory, more flexibility to adjust to demand shifts.
Use Just-In-Time Ordering
Just-in-time ordering is purchasing stock when you need it — not six months before you need it. This allows your money to keep moving and your warehouse to stay slim.
The problem is… it only works if you have good forecasting and dependable suppliers. Otherwise you end up stocking out every chance you get. Ease into it. Try it out with a couple products first. Then scale it to your entire assortment.
Track Your Cash Conversion Cycle
Your cash conversion cycle tells you how quickly you can convert inventory into cash. The faster, the better. Your cash conversion cycle equals:
- How long stock sits before being sold
- How long customers take to pay you
- How long you take to pay suppliers
Cut that number down by 10 days and you’ll have all sorts of money to invest in growth.
Tying It All Together
It’s difficult to balance your cash flow with your inventory. But it’s one of the best things you can do for your company.
Get it right and you’ll:
- Free up cash — so you can invest in growth and new opportunities.
- Minimize risk — don’t have dead stock or shortages of best sellers.
- Sleep better at night — because you know your business has the funding it needs to thrive.
Companies that get this right are going to scale rapidly and be profitable. Companies who don’t understand this…join the 82% of startups who fail.
Effective supply chain planning removes uncertainty. It provides you with the information required to make informed decisions about inventory and cash flow.
Begin with one small change. Implement one of the suggestions above. When that begins working, add another. Pretty soon you will have enough positive cash flow to think about expanding your business.
