Good inventory management is a key aspect of managing cash flow. Too much inventory depletes your business’s resources, tying up cash in the form of goods, as well as insurance, storage and interest charges on those goods. On the other hand, too little inventory can result in lost sales, delays and customer aggravation – free gifts to your competitors.
Inventory management is a juggling act. While you need to keep an adequate quantity and variety of goods on hand to meet customer demand in a timely manner, you don’t want to invest too much in goods that don’t sell well or may become obsolete, spoiled or irrelevant.
Many businesses strive to operate on a just-in-time (JIT) basis, holding stock for a minimal amount of time before moving it, selling it or using it. The keys to effective JIT inventory management are to pinpoint the rate at which each item in your shop moves and to maintain optimum stock levels for each item. To optimize stock levels, consider:
• Anticipated stock turns for each item
• Availability of raw materials and components to manufacture or assemble goods
• Time necessary for delivery by suppliers
• Shelf life for each item
To reduce excess inventory, you may need to sell off outdated or slow-moving merchandise. Remember that stock sitting on your shelves for long periods of time ties up money that is not working for you.
Keeping up-to-date and accurate records helps businesses succeed in many ways. Records help track the progress of a business, help monitor expenses and deductions, assist in preparing financial statements, show all sources of receipts, and help prepare and support tax filings.
Basic record keeping is required to manage all day-to-day dealings. These include an overall summary of all business transactions; profit/loss statements that show gross receipts, returns, and credits; income statements showing all gross income; and a business checking ledger that lists all business-related expenses.
In addition to basic bookkeeping, there are several supporting documents each business should keep. These documents are necessary for tax and legal purposes, but also speed up the process of creating end-of-the month/year reports.
All money received from the sale of goods or services is considered gross receipts. Documents that should be kept for proof of gross receipts include deposit tickets; cash register, credit card, or written receipts; invoices; and 1099-MISC statements. Any purchases the business makes, whether for the business itself or for resale, should be recorded as well. Such transactions include purchases of materials or inventory, office supplies, advertising expenses, insurance, and even trade dues. Some of these items may also need to be recorded on asset or depreciation statements. Back-up documentation for these entries includes invoices, cash receipts, cancelled checks, account statements, and credit card receipts.
Any expenses incurred from travel, entertainment, or transportation should also be documented and recorded for tax deduction purposes.
Sales tax paid to state and local governments, federal employer taxes, and employee taxes all need to be documented.
Think of something that could make money for your business: a truck to expand your fleet, a computer to make your staff more efficient, signage to draw more foot traffic, or perhaps a new machine to enhance your output capacity.
You could be more productive if you had that tool working for you. In fact, looking at it in another way, not having that piece of equipment is actually siphoning money away from your business.
Acquiring additional equipment or adding capacity can be a capital-intensive endeavor for SMEs, tying up funds that might otherwise be used for advertising, overhead, or reserves. Moreover, you will not begin to accrue a positive cash flow from the tools acquired until they are paid for – many months or even years down the road.
Often leasing is the right solution for SMEs. Leasing gives you the benefit of having the equipment work for you at a reasonable monthly fee and avoids a large initial capital outlay. Over and above that, the added capacity is contributing to your positive cash flow.
Leasing equipment enables you to start to appreciate the benefit of that equipment almost immediately. The equipment begins to pay for itself as soon as it earns a single dollar over and above the first month’s lease fee. You are essentially cash-flow positive from the very first month.
When you defer acquiring tools/upgrades/expansions, you are relinquishing the capital that they could be generating for your company.