Running out of inventory is the biggest concern among entrepreneurs. Sales immediately drop due to customers moving to your competitors. Once they abandon you, they will hardly ever come back. Supply of goods should not be restricted to ensure business growth.

Managing inventory is not a cinch. Balancing out between the demand and supply is necessary because overstocking will tie up cash that could be used elsewhere, and stocking too little means risking production and sales.

Poor inventory management leads to inconsistent stock availability and cash flow stress. Inventory purchases should align with cash flow. Most of the entrepreneurs purchase stock first and then figure out finances. Fortunately, this problem can be dealt with by tools that help you gain insight into real-time cash flows and inventory needs, so your business stays profitable.

Ways to manage inventory without cash flow problems

Here is how you can manage stock without bearing cash flow stress:

• Assess your current inventory needs

Before you decide to purchase stock, you need to carefully determine where you currently stand. Figure out how much inventory you already have, how long it will last, how much more you need to meet the demand, and above all, your financial position.

• Evaluate slow-moving stock which is tying up cash.
• Review sales trends and demand fluctuations.
• Use inventory management software to track available inventory.

You might likely find that some of the inventories remain six months old. This is called idle inventory. Your cash is tied up. Chances are, you keep overstocking inventory without realising how much you actually need. It is not surprising that inventories take the back seat, which leads to cash flow problems.

Knowing the inventory turnover rate will help make better purchasing decisions and avoid stockpiling. Assess demand against current inventory levels to ensure that only essential stock is purchased.

• Check your financial position

How much of the revenue is consumed in inventory purchase? This is an important question to consider. Check if stock buying is eating up cash flow. Bear in mind that inventory planning is paramount. It must be in line with profitability goals.

It is not something which is dictated by the availability of cash. If you are facing cash flow disruptions frequently, this is a red flag. You need to make some adjustments to the inventory.

• Align inventory purchase with the Profit First method

The biggest reason why inventory purchase disrupts cash flow is that they do not emphasise the Profit First method. It means sales – profit = expenses. Once you deduct profits from sales, the remaining balance should be utilised to meet all day-to-day expenses, and inventory purchase is part of that. In other words, inventory should be bought from cash which is available for the operating budget, which is the remaining balance after paying taxes, owners’ pay, etc.

In order to align inventory with Profit First allocation, you should:

• Ensure that inventory spending fits within the allocated budget. A predictable cash flow is required.
• Avoid stockpiling at the expense of wages, taxes, etc.
• Have funds to make bulk purchases.

You will also need to align the inventory cost with “profit first”. Set a clear inventory budget based on what remains after “profit first” cash. Instead of large, irregular purchases, consider smaller and more frequent purchases. You will be better able to manage cash flow with inventory requirements.

You should have a separate inventory account to ensure that you are withdrawing funds from the allocated budget, but sometimes you might need to purchase it in bulk to save money on cost. In that case, the remaining cash for day-to-day expenses might not be enough. You can use the Profit First budget. However, large upfront purchases can ruin cash flow.

If dipping into Profit First funds does not seem appropriate, you can consider taking out a retail business loan in the UK. These loans can help you purchase inventory in bulk. Since they are paid back over an extended period of time, you can easily manage them. Make sure to calculate the total cost of the loan.

• Use inventory software

You will have to accurately monitor how much inventory you actually have and how much you need to purchase. Not tracking your inventory will cost you a lot of money. You will need inventory software to avoid overpurchasing.

Inventory management software can help you a lot to avoid cash flow disruptions. It is certainly a game-changer. Now the question is, why is it vital to buy inventory management software.

• They help track inventory in real-time, so you know how much you currently own.
• These tools can forecast demand based on the past sales performance, so you can purchase inventory at the right time in the right quantity.
• It helps align purchases with cash flow.

Software will let you gain clear insight into current stock levels, which is extremely important for making profitable purchase decisions. You can accommodate the inventory software with the Profit First method. All you need to do is:

• Set a purchasing limit based on the available funds
• Review sales trends so you neither overbuy nor underbuy
• Strategically decide on the purchase time

Use a loan to purchase inventory management software if you are running out of cash. There are various financing methods you can consider. If you are unable to decide which one is better, talk to online business finance brokers in the UK.

• Monitor, review and adjust

Keep an eye on your stock. It is being sold so quickly that you never run out of it. Make sure that you evaluate the cost of inventory. Sometimes, it begins to rapidly increase. Make sure that you have a plan for funding the increased cost of inventory.

The bottom line

To maintain stock without disrupting cash flow, the Profit First method should be applied. Inventory purchases must be adjusted to remain within the balance allocated for operating expenses. Apart from that, you will need to purchase inventory management software. Keep tracking and evaluating the needs so you do not end up overstocking or understocking.