Let's talk about your stock

Is your stock tying up cash?

Continuing the theme from the last blog about Cash vs Profit, lets look at how your stock is tying up your cash. This is about stock you have paid for, not that sold on consignment.

This is timely because we are coming up to the end of the financial year and you will have to count it all on 31 March to give us your stock on hand value.

You do the big order from you suppliers. Cash goes out of your bank account.

In your accounts, that stock is recorded on the balance sheet as an asset (because that's what it is). If you look at your annual reports done each year, you will see a negative line under Cost of Sales for your closing stock. What is happening right there is the value of the stock at 31 March (or whenever your balance date is) is being removed from your expenses, and ADDED BACK as some pseudo income. Increasing your profit, which increases your tax to pay.

Seems unfair yes, but this is how tax law works.

So, on paper you are back to that larger profit we previously talked about. In reality you don't have the cash in the bank.

What is Stock Turnover?

This is how many times you sell and replace your inventory over a period of time. The formula is Cost of Goods Sold + average inventory. No need to memorise that. But if you do it, then an answer of 4 would mean you are selling and replacing your inventory four times a year. If it's 1 you are selling and replacing once a year. The higher then number, the better. Supermarkets have a high stock turnover, their numbers are probably well into double digits; lamborghini sellers probably very low.

So what can you do about it to minimise impact on your cash?

• Get to know your products. What sells well? Have more of that on hand. The rest? Don't buy "just in case"

• If a customer asks for it, how quickly can you get it? Can you drop ship direct from your supplier? Get an uber to go pick some up so you can get it to a customer same day? Add these to your online store, but don't hold the inventory for them

• We are coming up 31st March and all that stock needs counting and valuing. Now is a good time to discount slow moving stock and move it along before you have to count it. Also before it becomes obselete. Try and sell it for more than you paid for it is your main goal

• Do a quarterly review of your sales, circle back to What Sells, What Doesn't. Don't buy "just in case". The more you do this, the better you get to know your product

• Don't panic order and overstock. The product you are panicking about might be the next Beyblades, but probably not, and you might get stuck with it. Believe me, the number of resellers left with slow moving stock far out numbers those who didn't buy enough of something that proved really popular.. So you missed the boat on that product - and potential earnings - but that is better than the reality of cash tied up in inventory.

• Efficiency comes from moving stock quickly - keep the money cycle moving