Inventory occupies valuable storage and display space, so naturally you want to maximize your return on investment. But inventory is money that's been invested at a negative rate of interest: the longer it sits on your shelves the more it costs.
It's best to manage that inventory so that you've got just enough of it to service your customers and maintain adequate cash reserves for other business operations.
Analyze patterns to establish forecasts
If you've been in business for a while, you probably have some record of what sold and what didn't sell throughout the year. Analyze that data. Break the inventory down into categories and try to correlate the categories with customers. You may very well see a trend or pattern emerge. Depending on what business you're in, that pattern could correspond to the rhythm of the seasons, or it could be in-sync with the financial year-ends of your biggest customers.
Once you've discerned a trend or pattern, you can begin to plan acquiring and paying for that merchandise according to your needs. The idea is to stock the inventory just before you need to sell it, so that the money you've invested comes back into the business as quickly as possible.
A good inventory information system should allow you to capture sales history, and forecast sales, based on that history.
Turn dead inventory into cash
To recover some of the cash you have tied-up in dead inventory, it's best to mark it down for quick sale. Segment your dead inventory into the "bad" (meaning not selling right now) down to the "unsellable". Be realistic and merciless. Display and price the bad stuff so that it will sell. It's not important what you paid for it. What's important, is what your customers are willing to pay for it right now.
Alternately, you can talk to your distributor who may be willing to take some of that inventory back. Structure your proposal so that the distributor gets something out of the deal: perhaps they have other clients who could use that stock, or maybe you can offer to try out that new range of products they've been pushing? The distributor may only be able to provide a discount on your next order, but that will at least help improve your future cash-flow.
As a last resort, you may be able to donate the unsellable inventory to charity and generate a receipt for tax purposes.
Other ways of turning inventory into cash
There are ways to do business without maintaining excess or unproductive inventory. You can for instance, stock your fastest-moving items but maintain a drop-shipment agreement with the manufacturers/distributors of slower-selling items. Under a drop-shipment arrangement, the manufacturer/distributor takes care of shipping directly to the customer and you don't have to keep it in stock.
You can also try to improve cash flow by negotiating better payment terms with your suppliers. For instance, if you can hold payment for 45 or 60 days while getting your customers to pay within 30-days or less, you'll have more cash on-hand. To get cash quickly, you can sell your receivables to a factoring company who then collects from the customer.
If your company has a good reputation for fulfilling its transactions and your clients have a good credit history, you may be able to arrange purchase-order financing. In this arrangement, your inventory as well as purchase orders, and accounts receivable are used as collateral for the loan. Asset-based lending is another option that can be used to secure cash for operations and growth.
Inevitably, there will be items that didn't sell at the fully marked-up price, so you will have to eliminate them from your inventory. By planning ahead, you can set the dates for the markdown sale and eventual liquidation of stock that isn't moving. With a plan, you'll be more in control: as each sales period passes, you'll be able to measure results against the expected outcome and to adjust your business plan accordingly.
But if dead inventory is a recurring problem in your firm, there could be deep-seated problems that you may have difficulty solving. At that point, it might be a good idea to call in some outside expertise like BDC Consulting, which has a national network of business advisers to help you plan inventory, manage accounts receivable and improve your company's cash flow.
