Today’s uncertain economic environment means business owners and CFOs want to have as much cash on hand as possible for unknowns, and that means making sure your money isn’t tied up in inventory too long.
Recent data shows that privately held companies in the U.S., on average, have seen their inventory days ratio increase 16 percent since 2009. That means the number of days from when raw materials are purchased to when finished goods are sold is up — to nearly 24 days from about 20.5 days three years ago.
Of course, some inventory growth is necessary when sales are rising, and sales have been on the increase for private companies. “I’ve always been an advocate of the less inventory, the better, but you have to be able to meet demand,” said Michael W. McNeilly, Director of Advisory Services for Sageworks Inc., a financial information company that analyzes privately held companies.
But he and other experts say that cash is the lifeblood of your business, so it’s a good idea to manage inventory closely. Coupled with later customer payments, which many U.S. businesses are experiencing, a longer inventory turnover cycle means less money that’s available to buy new equipment, hire or otherwise grow your business.
Is More Inventory On-Hand the Answer?
McNeilly has worked with a lot of businesses operating with the traditional belief that keeping a lot of inventory helps create a better presentation of merchandise for customers.“Some business owners may also believe more inventory allows them to obtain bulk-purchase discounts from suppliers,” he said.
“That may sound good, but bulk purchases in a lot of situations only take up space and tie up cash. It’s always a balancing act, but today’s marketplace will often allow for a smaller inventory on hand with same-day or next-day delivery on additional inventory. “
“Having good control of your inventory allows you to not only offer a wider selection of products but also can free up significant levels of cash flow while still providing the service your customers demand,” he said.
How to Effectively Manage Inventory
Consultant Bob Phibbs, who has worked with Lumber Liquidators, Hunter Douglass and others through his firm, The Retail Doctor, says a good place to start with managing your inventory is performing a physical count. This is a good idea for insurance purposes. “It’s also a major determiner of your store’s health,” he said.