For many businesses, balancing inventory levels and cash flow can be a real challenge. With a huge amount of uncertainty in both supply and demand, businesses rely on their inventory to absorb challenges in the market place. However, simply keeping large inventories of every item is simply not an option. Considering the financial restraints on cash flow, Businesses have to take a strategic approach to their inventory management.
Ultimately businesses hold stock in order to satisfy customer needs. Without sufficient levels of stock, customers would simply turn to the nearest competitor. As a result, keeping items in stock is key for competitiveness.
Take for instance the retail industry; this year, merchandise from the film Frozen and Lego products are expected to be the in huge demand. While many purchases at this time of year are likely to be gifts for others, customers are still not likely to be willing to wait for popular items to come back in stock. In the run up to Christmas, many stores will start investing heavily in stocks of these products in order to capitalize on this year’s festive demand.
Financial constraints on cash flow
Although it could be argued that holding large inventories maximises opportunities to make sales, holding large inventories can also come at a huge cost. Firstly, there is the additional cost associated with holding excessive inventories such as the extra transportation fees and warehouse space required. Furthermore, by holding larger inventories, working capital becomes tied up in stock. Given that all inventory is subject to obsolescence, damage or in some cases perishability, there is no guarantee this investment will ever come to fruition.
While products with high demand like Disney’s Frozen branded toys or the latest Lego figurines are unlikely to suffer from this issue, for slower moving products this can be a real strain on cash flow.
Balancing inventory and cash flow
As a result, businesses must review their stock holding in order to find the balance between inventory levels and working capital. Through aligning inventory levels with customer demand, businesses can satisfy demand and still maintain a healthier cash flow.