Stock – the secret cash eater!

Blog Author – Kevin McNeil, Associate Director, SouthWestfd

Just imagine if you could reduce your stocks by, say 25%; that might just be equivalent to the overdraft amount you have been requesting from your bank and it comes at 0% interest!

Businesses, quite rightly, are concerned about collecting cash from their customers as quickly as possible and paying their suppliers no faster than the agreed terms. However the third main element of working capital, namely what you hold in stock, is often not as visible and so not treated as such a priority. We all need stock to sell on to customers, or feed production, or provide services – basically to run our businesses, but how much and of what? Stock doesn’t just use up cash resources, it also takes up physical space in the business and too much leads to operating inefficiency. Having the wrong stock means that you may have too much stock overall or, of equal concern, you have too little of the stock you really do need!

• The first thing is to know how much stock you hold. If data from your IT system is reliable then great, if not then undertake a stock-take to ascertain precisely your stock levels.
• Next categorise the stock into different types, whatever is appropriate for your business. This may be raw materials, WIP and finished goods, or perhaps product ranges A, B and C.
• Within the categories, perhaps starting with the larger value items, ascertain which are items that are used regularly (current), used occasionally (slow moving), unlikely to ever use (obsolete) and damaged or faulty (scrap).
• You will now start to get a clearer picture of the stock you hold. You might be surprised at how much you classify as non-current stock. Whatever you find you are likely to need to address two issues;
• Reducing your non-current stock. This will involve a combination of strategies which may include sales/discounts to customers, cancelling purchase orders, or selling on or scrapping obsolete items.
• Reviewing your future purchasing strategy. Consider supplier lead times, order quantities, price breaks, stock usage and how you might react to, or anticipate, changes in demand. It may not make good business to take a bulk buying discount that means you have stock on your shelf for the next two years.

Remember stock is your cash; you want it to be working for the benefit of your business.