Understanding The Link Between Cashflow, Proper Inventory Management And Profitability

Understanding The Link Between Cashflow, Proper Inventory Management And Profitability

Any business expert will tell you for a fact that cashflow, proper inventory management and profitability are interlinked.  In other words, you can put your business at a disadvantage if and when you fail to manage any of these three factors.  It is also important to note that the relationship between cashflow and inventory control is significantly determined by the amount of inventory stock you manage, your choice of inventory accounting technique or method and your inventory turnover. You therefore have no choice but to be an excellent manager. Each figure simply counts.

Inventory Control

The rule here is simple. Effective inventory control always boosts cashflow exactly the same way bad stock management leads to unnecessary costs and other cashflow challenges.  Remember that there is no way you can avoid holding inventory. Remember too that holding too much inventory stock ends up tying money that could have been used or invested in other key areas of your business. There is also the fact that apart from the initial cost of stock, you also have to bear ongoing costs and expenses of holding stock and maintaining stock in a saleable condition. Think about it this way. Failing to have enough on-hand inventory means you risk stock outs .This often leads to reduced customer satisfaction, lost sales and potential loss of future sales.

Inventory Turnover

It is in simple words, the measure of how well your business is doing. It also takes into account the turnover ratio which in turn determines the number of times you buy and sell inventory stock within each financial year.

There are two ways of calculating inventory turnover ratio. There is the Cost Of Goods Sold method aptly referred to as COGS.  With this method, the cost of goods is subtracted from total sales revenue. This ascertains business gross margins.  The second method is simple as it involves adding the beginning inventory of a given period to the end of the period then dividing by two.

Inventory Accounting Methods

This is where POS systems come into the picture. But that is not everything. There are other skills you’ll need so as to ensure you have each figure factored in your accounts. You’ll have to choose from three main accounting methods which experts use to determine the cost of inventory. The three methods, FIFO, LIFO and the weighted average method all guarantee accuracy. Of these three, the weighted average method stands out as the most preferred method. It involves dividing the total costs by the total number of units so as to come up with the weighted average cost. Be sure to adjust the figure each time you bring in more inventory.

Other Key Factors

There are other factors have little to do with cashflow and inventory management which can affect your profit margins. One such factor is customer care. That way you treat and handle your customers matter more than you may ever know. Be flawless here as you are with the inventory and cashflow management end. The end result is always something you can smile about each time you look at your business account.