Efficient inventory management improves your company's liquidity!
In our previous article, we told you how managing the most important components of working capital: inventory and work in progress (WIP), accounts receivable and accounts payable can free up cash. Together, these components represent the “cost of purchases that has not yet been converted into cash by sales”.
In this article, we focus on how you can optimize your working capital by managing your inventory and work in progress more efficiently. Continue reading to find out how.
Efficient inventory management is key!
An efficient inventory management is vital to every company’s success since a solid inventory management results in: delivering promised quality, respecting delivery dates, purchasing cheaper, producing more efficiently, registering correct inventory information in your IT system, etc.
Additionally, the impact of efficient inventory management is possibly even more influential on your company’s liquidity… From a working capital perspective, efficient inventory management is about continuously finding the right balance between:
- purchasing too tight and risking inventory shortages;
- purchasing too much and getting more money stuck as inventory.
Tips and tricks
The type of inventory within your company highly depends on your activities. As such, every company has different types of inventory: raw materials, semi-finished goods, finished goods, trade goods or work in progress. As a result, initiatives for a better inventory management must be tailored to your company, tailored to your type of inventory.
Below, we share some tips that might immediately improve your inventory management:
- Align your order- and production planning as precise as possible. As such, you should try to only produce goods that have been ordered or for which you estimate to soon receive an order;
- Group your purchases to receive better purchase conditions (e.g. quantity and financial discounts);
- Purchase fact-based instead of gut-based. As a result, you will avoid purchasing inventory “just to be sure”;
- Introduce inbound controls to faster identify wrongly delivered or non-usable goods;
- Verify if all goods are registered as inventory in your IT system, including the goods that look randomly stored in your warehouse’s “forgotten places”;
- Identify and try to sell slow-rotating or obsolete inventory;
- Evaluate your subcontractors and measure if not too much time is lost during subcontracting orders;
- Analyze your sales data to always ensure sufficient inventory of your best-selling goods, while decreasing inventory of other goods;
- Do not only evaluate your suppliers based on price, but also evaluate the terms of delivery. The longer terms of delivery are, the higher your minimum inventory levels will likely be and thus the more working capital is required;
- Do not drastically, but incrementally lower your inventory levels to avoid inventory shortages.
In short, a combination of targeted controls, management of the adequate performance indicators (e.g. inventory rotation), fine-tuning of your sales forecasts as well as analyses of sales and purchase data can aid your company to:
- further organize and steer inventory efficiently;
- identify inventory-related opportunities or risks.
In our next article, we will point out how effective credit management can add to improving your company’s working capital.
horsum is a recognized service provider of the KMO-portefeuille.
Cédric Verfaillie – October 5th, 2016