The first sign of problems is often a reduction in net profit while the last post, literally the last post is a severe cash flow deficiency. Sound accounting procedures should produce financial control information on stock levels, debtors and creditors and financial investment to provide early warning systems of impending cash flow problems.
Larger businesses have accountants producing financial information who also review and monitor all major financial influences within the business. Smaller businesses often do not have these finance details and financial controls and put themselves at risk since as the credit crunch tightens the businesses that are most at risk are those which fail to manage their liquidity until it is too late.
Major significant areas where businesses produce or purchase goods for resale are the stock levels. Finished stock, raw materials, work in progress and consumable stock all require attention to ensure adequate stock levels are available to the business and overstock positions are eliminated.
All stock has to be financed and funded from either the working capital of the business or external funding. If the business has no external funding costs then high stock levels may be advantageous in obtaining better supplier discounts when purchasing. When the value of stock has to be financed then it is important the stock levels are managed to use up the minimum financial resources.
Stock management is not just about reducing the volume but is about always having just enough for the level of sales without stock shortages. Businesses employing accountants set a stock policy while this duty is left to the business owner in small businesses.
The first step would be to carry out a stock audit through a physical stocktaking and produce financial statistics of the sales volume for each item in the stores. Where appropriate the accounting system adopted should produce easily accessible stock figures so the situation can be constantly monitored.
Monitoring stock quantities by including sales and purchases can also provide indications of abnormal stock losses through loss and theft. Valuable stock especially with a potential resale value should be kept separately, protected and access restricted.
Armed with the stock levels and turnover figures policies can then be developed to manage the stock investment by initially eliminating or reducing purchase orders for those items over stocked and increasing the stock levels of those items under stocked to maintain maximum sales volume by eliminating shortages.
In addition other factors affecting stock levels include purchase order quantities and delivery schedules and reliability of the supply chain. By ordering less more frequently and arranging better delivery schedules stock quantities can be reduced saving valuable cash resources and improving liquidity without reducing sales.
Commercially, minimum stock levels are not always prudent. Advantage has to be taken of bargains, volume discounts and the risks of stock shortages but these decisions should always be taken based upon the financial advantages of over stocking outweighing the cost of financing that stock. High stock values affect cash flow.
Sales policy can also have a strong influence on stock levels and should be managed with a view not just to achieving maximum sales but also to minimise the business financial investment in working capital. Sales can achieve this by directing policy towards a higher turnover of goods, selling goods bought at bargain prices faster and clearing slow moving items.
If goods are bought at a cheap price there is every chance such items are at higher volumes than normally required and sales policy can move these items faster to reduce the cash flow requirement and improve business liquidity.
Every business has slow moving items and products that become obsolete. Such items are using valuable cash resources required in a credit crunch and turning such stock into cash benefits the business and provides additional funding for more profitable items.
Delivery policy affects stock levels and might be reviewed. Delivering faster and perhaps outsourcing the delivery function can get the goods to the clients faster. That reduces the stock levels and should result in cash being received faster as the customers can be invoiced earlier improving cash flow.
Retail businesses often have limited policies of stock quantities other than filling the shelves while retaining a back room full of goods which are not available for sale until displayed. Every stock item in the back room is costing money while sitting there. That cost can only be justified in commercial terms if the quantities being held will be required before the next delivery is due or has been purchased at an abnormally lower price.
Every different type of business has its own inventory requirements with many different factors being applicable. The important message is not what should be done about this item or that item but the fact that there is an overall stock policy appropriate to the type of business to enable the business to function at maximum volume with minimum financial investment in stock.
Reviewing stores and inventory policy can reduce the cash flow and working capital requirements of business. The increased cash flow can then be used to improve the purchasing policy to take advantage of market conditions and offers as they arise to increase overall profitability.
A lack of inventory control can result in a fire sale operation should cash flow and liquidity be so strained that the financial cash resources of the business run out. Good stock control can avoid such drastic measures
Terry Cartwright, CEO DIY Accounting, a qualified accountant in the UK, designs Accounting Software
on excel spreadsheets and Payroll Software
for small to medium sized business providing a complete accounting solution and also supplies Company Formation
packages for new limited liability companies
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