Is too much stock tying up your cash?

Stock is useful only if it helps you make sales when customers need it. Until then, it is cash you cannot use to pay wages or rent. Too little stock can lose sales, so the answer is to match purchases to demand and delivery time, not simply to empty the shelves.

See the cash behind the stock figure

Suppose a homewares shop has $60,000 of stock at cost. Its stocktake shows $18,000 has not sold in four months. The owner has also committed to a $12,000 reorder because the supplier offered a discount. That could put another $12,000 into inventory before the older items turn into cash.

Ask what is selling now, what is seasonal, and what may need a markdown or return agreement. A discounted sale may recover less than the original cost, but leaving the item untouched may also cost storage and future cash. Compare choices with an accountant if the write-down is material.

Count, group and set reorder points

Start with a physical stocktake and reconcile it to the system. Group items as fast moving, seasonal, slow moving and obsolete. For each item, compare recent sales with how long your supplier takes to deliver. A simple reorder point is the amount likely to sell during that lead time, plus a considered buffer for demand or delivery changes.

If you sell 10 items a week and delivery takes two weeks, ordering when stock reaches about 20 units is a starting assumption. You may need a buffer if demand is variable or supply is unreliable. The official inventory guide explains stocktakes and reorder points.

Test the next order against cash

Put the supplier payment date and likely customer receipts into the cash-flow forecast. If the order arrives before seasonal demand and must be paid immediately, can you still cover other bills? Compare a smaller order, a later delivery or revised supplier terms. Use the supplier review checklist to compare the full cost, not just the unit price.

The debtors and creditors lesson shows how stock days join customer and supplier payment days in the cash conversion cycle. For a direct starting point, read improve cash flow without borrowing.

Important things to know

• A bulk discount can be outweighed by slow sales, storage, damage or expiry.
• Reorder points are planning estimates; update them as demand and lead times change.
• Stock accounting and tax treatment may differ from the cash paid to buy it. Ask your accountant about material valuation or write-down decisions.