For many small businesses, balancing inventory with supply and demand is a constant headache. How do you ensure your business has the stock on hand to meet customer demand without overstretching yourself financially by purchasing and storing inventory long before you receive any revenue for its sale?
The inventory question in 2022 is more important than ever as supply chains continue to be impacted by COVID-19 (a problem is likely to persist, certainly until higher levels of vaccination are achieved on a global scale). The past two years have also seen changes in customer behaviour and the explosion of online shopping which present an evolving challenge to the operations of many businesses. Similarly, businesses of all sizes are choosing to stockpile in order to protect themselves and their customers from the supply change issues experienced over the past two years.
For many, inventory is the main source of business revenue, so it is critical to invest time in planning ahead, understanding the market including factors that impact supply and demand and drive customer behaviour. Of course, there is no magic solution to the problem of how much stock to hold but businesses that are strategic, agile and have good cash flow will have a better chance of getting the balance right.
Let’s take a look at some of the risks and benefits of holding inventory.
- Wholesale pricing – often businesses are able to take advantage of lower wholesale prices when they buy larger quantities, leading to greater profit margins.
- Quick fulfilment – orders are fulfilled straight away leading to a better customer experience (rather than waiting until the stock arrives to dispatch).
- Mitigate shortages to create an advantage – by investing in holding inventory your business guarantees the availability of stock, giving you an edge over your competition.
- Capitalise on current trends – most online shopping platforms now show stock levels/availability, customers are more likely to buy an ‘in stock’ item rather than wait.
- Cash flow is impacted – investing in holding inventory can mean that a larger portion of working capital is tied up which can in turn impact cash flow and growth.
- Outdated/obsolete inventory – consideration must be given to the ‘shelf life’ or desirability of the products you are holding e.g., if you are holding outdated stock and something new has come on the market you may end up selling below cost.
- Higher storage costs – holding more inventory requires extra storage, the cost of which will need to be addressed in your pricing (this could push up the cost of your products over those of your competitors).
- Profit impacted by loans and discounts – overstocking significantly can lead to the need to sell at heavily discounted prices to clear space. Similarly, if you have used a business loan to purchase inventory, monthly repayments and fees may impact profit margins.
Striking the right balance
It can be tempting to hold excess inventory to ensure you can always provide for your customers, but businesses should fully evaluate the risks associated. Holding excess inventory may mean a greater upfront investment, additional shipping, storage and insurance fees. Additionally, if your business requires a short-term loan to finance these costs, you may find that your profit margins are squeezed.
Businesses must compare the costs of investing in holding excess inventory vs. the costs of buying stock quickly (potentially at a higher price) to meet demand or cover shortfalls – a robust pipeline is key to the success of this strategy.
While holding enough inventory to provide for your customers in a timely manner is undoubtedly a sound approach in 2022, there is no getting around the fact that your working capital may be impacted. You pay for the order upfront and the storage and insurance costs are ongoing. For businesses who are operating with small margins and on tight monthly budgets this can impact operational costs and business growth as cash is tied up. Additionally, the longer the time between your purchase and the sale of the product can put a squeeze on profitability.
Striking the right balance
For businesses looking to invest in holding inventory but are worried about tying up working capital, invoice finance can be a great solution. Invoice Finance is a flexible funding solution that gives your business access to the funds from your own invoices as soon as they are issued – closing the gap between when you invoice and when you are paid. By getting working capital back into your business faster, as well as more certainty around cash flow, you may have the opportunity of purchasing more stock or taking on larger orders, ensuring growth opportunities are not missed.
Certainly, there is a growing appetite both among small and large organisations to stockpile in order to meet their obligations to their customers and gain a competitive edge. The effectiveness of this strategy though comes down to careful planning, business agility and good cash flow.
To find out more how an invoice finance facility could help your business grow in 2022 visit apricityfinance.com or call 1300 277 424.