The first sign of problems is often a reduction in net
profit while the last post, literally the last post is a
severe cash flow deficiency. Sound accounting procedures
should produce financial control information on stock
levels, debtors and creditors and financial investment to
provide early warning systems of impending cash flow
problems.
Larger businesses have accountants producing financial
information who also review and monitor all major financial
influences within the business. Smaller businesses often do
not have these finance details and financial controls and
put themselves at risk since as the credit crunch tightens
the businesses that are most at risk are those which fail
to manage their liquidity until it is too late.
Major significant areas where businesses produce or
purchase goods for resale are the stock levels. Finished
stock, raw materials, work in progress and consumable stock
all require attention to ensure adequate stock levels are
available to the business and overstock positions are
eliminated.
All stock has to be financed and funded from either the
working capital of the business or external funding. If the
business has no external funding costs then high stock
levels may be advantageous in obtaining better supplier
discounts when purchasing. When the value of stock has to
be financed then it is important the stock levels are
managed to use up the minimum financial resources.
Stock management is not just about reducing the volume but
is about always having just enough for the level of sales
without stock shortages. Businesses employing accountants
set a stock policy while this duty is left to the business
owner in small businesses.
The first step would be to carry out a stock audit through
a physical stocktaking and produce financial statistics of
the sales volume for each item in the stores. Where
appropriate the accounting system adopted should produce
easily accessible stock figures so the situation can be
constantly monitored.
Monitoring stock quantities by including sales and
purchases can also provide indications of abnormal stock
losses through loss and theft. Valuable stock especially
with a potential resale value should be kept separately,
protected and access restricted.
Armed with the stock levels and turnover figures policies
can then be developed to manage the stock investment by
initially eliminating or reducing purchase orders for those
items over stocked and increasing the stock levels of those
items under stocked to maintain maximum sales volume by
eliminating shortages.
In addition other factors affecting stock levels include
purchase order quantities and delivery schedules and
reliability of the supply chain. By ordering less more
frequently and arranging better delivery schedules stock
quantities can be reduced saving valuable cash resources
and improving liquidity without reducing sales.
Commercially, minimum stock levels are not always prudent.
Advantage has to be taken of bargains, volume discounts and
the risks of stock shortages but these decisions should
always be taken based upon the financial advantages of over
stocking outweighing the cost of financing that stock. High
stock values affect cash flow.
Sales policy can also have a strong influence on stock
levels and should be managed with a view not just to
achieving maximum sales but also to minimise the business
financial investment in working capital. Sales can achieve
this by directing policy towards a higher turnover of
goods, selling goods bought at bargain prices faster and
clearing slow moving items.
If goods are bought at a cheap price there is every chance
such items are at higher volumes than normally required and
sales policy can move these items faster to reduce the cash
flow requirement and improve business liquidity.
Every business has slow moving items and products that
become obsolete. Such items are using valuable cash
resources required in a credit crunch and turning such
stock into cash benefits the business and provides
additional funding for more profitable items.
Delivery policy affects stock levels and might be reviewed.
Delivering faster and perhaps outsourcing the delivery
function can get the goods to the clients faster. That
reduces the stock levels and should result in cash being
received faster as the customers can be invoiced earlier
improving cash flow.
Retail businesses often have limited policies of stock
quantities other than filling the shelves while retaining a
back room full of goods which are not available for sale
until displayed. Every stock item in the back room is
costing money while sitting there. That cost can only be
justified in commercial terms if the quantities being held
will be required before the next delivery is due or has
been purchased at an abnormally lower price.
Every different type of business has its own inventory
requirements with many different factors being applicable.
The important message is not what should be done about this
item or that item but the fact that there is an overall
stock policy appropriate to the type of business to enable
the business to function at maximum volume with minimum
financial investment in stock.
Reviewing stock and inventory policy can reduce the cash
flow and working capital requirements of business. The
increased cash flow can then be used to improve the
purchasing policy to take advantage of market conditions
and offers as they arise to increase overall profitability.
A lack of inventory control can result in a fire sale
operation should cash flow and liquidity be so strained
that the financial cash resources of the business run out.
Good stock control can avoid such drastic measures.
----------------------------------------------------
Terry Cartwright is a qualified accountant designing UK
Accounting Software at http://www.diyaccounting.co.uk/
providing complete accounting solutions for small to medium
sized business in the UK written on excel spreadsheets at
http://www.diyaccounting.co.uk/smallbusinessaccounting.htm
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