“Stock levels and stock turn”
When was the last time you reviewed your stock levels?
Have you ever compared your sales against the value of stock you are carrying?
Have you calculated the influence it has on your cash flow?
Here are a few things to consider:
– The amount of stock you carry directly influences the amount of cash you have available, if you carry too much stock your cash will be tied up unnecessarily. Cash flow is the backbone of our business; we need to manage it on a daily basis. If you are using someone else’s cash (e.g. bank overdraft or loan) it is even more critical and expensive and you need to ensure cash “flows” and is not tied up in stock.
– Also keep in mind that inflation drives stock values up, that means the amount of working capital you need increases just as stock values increase. If you don’t increase your working capital over time you will run into a cash flow problem. This is most evident in the value of fuel. If the fuel price increases by R1 in a year and you carry on average 50 000 litres in your tanks you will need an additional R50 000 in working capital.
– Keeping too much stock also means you are ordering too much or too soon, ideally you should order every week or every 2nd week. We frequently rely on merchandisers or managers to place orders. They often have little understanding of your cash flow and don’t realise that big orders tie up working capital.
– Stock turn refers to the number of times you “turn” the value of all your stock in a given month. For example, if you have R600 000 of sales and carry R200 000 worth of stock you “turn” your stock 3 times per month. A good stock turn for a retail convenience business is 2.5 to 3 times per month. You need to strike a balance between the frequency of orders (weekly rather than monthly) and the buffer stock in your store room.
– Keeping too much stock also creates other risks. Risk of stock being damaged, stolen or becoming expired. A store room is not a warehouse for keeping stock in case you need it. It’s a temporary holding area for buffer stock that cannot be put on the shelf. Have a look at your store room, you should have just enough until the next delivery.
– Draw sales for each department and compare it to the stock value you are carrying in that department. It could highlight one or two areas where you are investing a lot of working capital, but receiving only a very low stock turn. You may be able to free up some cash if you are overstocked in that department.
You can further increase your stock turn by negotiating terms for payments of stock. If you can turn stock once before you pay for it, you are effectively using the suppliers’ working capital to finance your stock.
DON’T forget that in order to control stock you need accurate stock information. That means receiving invoices accurately on the system, ensuring cost prices are correct and that negative or 100% margins are fixed immediately.
DO continue to count stock regularly. If you maintain low stock levels then counting stock should be fairly easy. An overstocked store room is difficult to control and difficult to count. Also, counting the day before delivery ensures you have the least counting to do.
DON’T forget to keep track of how much working capital you have invested in stock. Keep in mind that cost prices increase over time which means that you need more and more working capital to finance the stock you keep. If you take all profits out of the business and don’t make provision for stock you will run into a cash flow problem.
DO train all your staff and management to understand that cash flow gets tied up in stock. The size and frequency of orders they place directly affects the cash flow of the business. They need to order frequently and consistently. They need to warn you of any “special” orders being placed e.g. double-orders of cigarettes before price increases
Make a list of the order days and delivery days of all your suppliers. Review the current stock value of products in each department. Discuss the list with the person(s) placing orders and determine the optimum number of orders to be placed and the best stock level to maintain to ensure shelves are full and store rooms are empty.
FUTURENT Consulting assists and supports the Fuel Industry to become profit efficient. Contact us at any time. We focus on:
- Consulting Services
- Enterprise Performance Improvement
- Business Process Outsourcing