Inventory Management and Cash flow in retail

In these challenging times, CFOs are acutely aware of their businesses’ pressures. The phrase “Cash is king” is amplified now more than ever. Cash flow is the lifeblood of any business. Without it, there can be no inventory to sell, no employees, no marketing or advertising or facilities to house, and no merchandise and assortment planning. Little can be done to fix costs such as your rent, but inventory management is an area worth spending the time to get it right. Proper inventory management at the right time can give you much-needed cash, while the wrong decisions will burn through your cash and jeopardize your business.

Inventory vs Cash

One of the biggest expenditures in retail is inventory. In a time when cash is such a precious commodity, it’s critically important for retailers to ensure their inventory investment is well placed. In retail, there is a long-standing 80/20 rule, which would imply that 80% of sales are generated from 20% of inventory.

If this is true, then there is potentially 80% of your inventory that is less productive and likely a cash drain, this is not good inventory management! Of course, there are some good reasons for having the less productive inventory on hand, product selection for one. Carrying 20 products instead of 100 would make the store boring to shop in. Customers fundamentally want the perception of choice, it’s part of the shopping experience.

How productive is your Inventory?

But for all of the valid reasons we carry more than 20% productive inventory, there are also a lot of bad reasons. Overbuying accounts for 30% of all markdowns according to Coresight Research. In its research, it found “the average full-price sell-through rate among US nongrocery retailers is 60%”. That means 40% of the products are sold at reduced prices or markdowns.

Let’s look at the impact of this. Let’s say your annual sales revenue is $100 million. According to this research, 40% of that revenue is sold in markdown. That’s $40 million of your sales that’s not sold at full price. The same research says that 30% of this is due to overbuying. That’s $12 million worth of inventory you didn’t need, tied up in unproductive inventory rather than cash.

See also: How do I get control over markdowns?

Overbuying is what we in the industry call assortment creep. It’s the desire to carry every possible product your customer might want. In a time when cash is so critical for the survival of the business, financial discipline on how and where to invest your inventory is a must.

Tools you Need in your Toolkit

For retailers, there is an inverse relationship between inventory and cash flow. The more inventory you have on hand, the less cash you have. The key is to actively manage your inventory planning.

The job of your planning and buying team is twofold.

1. Your merchandise planning will give you insight into your sales forecast and the inventory investment needed. Keeping a keen eye on your inventory metrics such as open-to-buy,  inventory turn and stock to sales ratio will be critical to understanding your cash flow position across time.
2. Use an assortment planning or buying tool to ensure you are buying the right mix of products that will sell in the quantities you expect for each of your sales channels. Synchronize your buy plan with your merchandise financial plan to reduce the tendency to over or under-buy and maximize your return on your inventory investment.

Check out what your margin improvement potential is here >>

Planning Best Practices

Keep the 80/20 rule in mind. Now is the time to trim your non-productive inventory from 80% as much as possible.

1. Gather data. Listening carefully to your sales staff and your customers before you build up your inventory. Keep a sharp eye on your sales forecast.
2. Plan and buy your inventory as close to the time of sale as possible so you’re not tying up your cash for any longer than is necessary.
3. Iterate frequently to be sure your forecast is still realistic and relevant. Be agile to react and take necessary action.

In these challenging times, history does not provide us with the guidance needed for forecast accuracy. We must rely on the most current data and trends. Listen intently, and be willing to adjust course – quickly.

Agility to React

The same Coresight Research found an overwhelming 72% of respondents who rely on data entry/manual input tools said that their company faces challenges from underbuying and/or overbuying inventory. This should not come as a surprise to anyone. Timeliness to react, accuracy in your decision-making process, and the ability to iterate continuously are critical success factors in today’s dynamic business climate.

Investment in technology that enables you to do these things will be your best return on investment. It will be critical to your survival.