Buying inventory seems like it should be a no-brainer for the business that offers a product to sell as their main source of revenue. You offer a product, consumers buy it, you restock, and the cycle goes on. Seems like a simple concept until you are juggling having enough cash to buy inventory to sell, launch a new product and maintain the business at the same time. Like most parts of running and growing a successful business, it takes planning. Buying inventory can be narrowed down to proactively understanding and maintaining five areas. To best navigate the inevitable complexities of purchasing inventory, let’s review the aspects of each.
Reorder Point and Safety Stock
You never want to be in a position where you tell an eager customer or wholesaler “no”, when they come to you excited to buy your product. This is one of the biggest business buzzkills out there. Just let word get out that you don't actually know if or when your product will be back in stock and see what that does for growth. Actually, don’t - we don’t want your business to die a slow death. Do this instead: have safety stock. This is where knowing your reorder point and having safety stock in place means a ton for business success. Even if you are waiting on a new product to come in, at least having items on hand to fulfill orders or sell alternatives will go a lot further for you than saying “sorry, we don’t have that”.
Best case scenario, your reorder point is when your stock levels meet the minimum amounts before reordering is necessary. This is also when those stock quantities selling will match the time it takes to get new stock in. As any business owner knows, this is not a 100% reliable fixed time frame, so you will likely need some built in buffers as well. You will also need to understand the quantity typically needed to reorder. This is probably a no-brainer, but still a factor to plan for, manage, and consider in accordance with your other factors at play (read on for these).
Lead Time: From PO to Receipt
The simplest way to define lead time is the time it takes from purchase order to delivery. You know your suppliers and manufacturers well, so there may be some considerations across all of them. Maybe the artsy, but really skilled supplier that creates your really high demand product needs a few more weeks built in to compensate for their lack of discipline getting your order finished (they just needed that one extra day in Santa Fe, NM for inspiration). Or your overseas supplier may inevitably be one to build in extra days for shipments clearing customs. Hopefully you have at least one reliable source that you can rely on for accurate updates and delivery times. Either way, having ordered before, there should be a general understanding of the timing of each. And with that knowledge, you can plan accordingly.
Quantity to Reorder
So how much do you really need to properly restock, anyway? There should be a minimum order in place in your calculations that meets your typical sales requirements. Knowing the cost of this typical order quantity will help greatly in your planning. This is considered one of your more fixed variables. If you have your go-to suppliers or manufacturers on board with this number, it will also help in their planning too, as they will be able to plan for and manage your reorders (and the associated money headed their way) more efficiently in the future.
Velocity of Movement
This is the speed at which your products sell. Considering the other variables at play, this is probably the most direct variable as it pertains to buying inventory. Whether you gauge this as a month-over-month or week-over-week figure, you will need it to understand how quickly you should reorder, and which products move best. It will also give you a good idea of how your cash flow will look. Best case scenario, you are increasing your velocity. This is also something to consider as you manage the timing of your ordering process.
You can look at this figure as an overall view, which averages over a number of factors - by SKU and by sales channel, but don’t forget to drill down into these items too. This will also dictate some marketing strategies to move slower moving products. Again - with the goal to increase velocity over all SKUs and sales channels, and to obtain those numbers for cash flow and reorder amounts.
How Automation and Systems Help
In the back of your head, you are probably relating this to your business and realizing how much labor is involved manually recording and studying these factors. Then you need to find the time to implement reordering within the time frames to maintain your safety stock and navigate the order process without running out. Can you see how managing a manually inputted spreadsheet would become very overwhelming, very quickly for the business managing multiple SKUs over various sales channels? This is where we dive back into those helpful inventory systems mentioned earlier.
Having a regimented, and automated methodology applied to your inventory will automated many of these mini research tasks. You can pull easy-to-understand reports to show you the many factors influencing your orders. Imagine being able to see the actual lead times you had when you last ordered by each supplier. You can also view your velocity by SKU and sales channel in various date ranges. Systems like DEAR Inventory will automatically compile these reports for you. It will create these smart order reports and give you some serious insight into each channel. So, how is that spreadsheet working for you?
Don’t Forget Cash Flow
The last, most pivotal factor that dictates how easily all of these other pieces can be managed is cash flow. If all of these factors seem complicated to you just reading through them, try doing this without the large amounts of cash on hand to make it all happen. There are a few key things that will help your understanding of cash flow, and having accurate reporting (and a reliable, quality reporting function) will help you predict cycles of sales and timing of purchases and sales.
Accountfully manages all of these factors, but most importantly, the cash flow. We provide weekly cash flow snapshots, so the business owner can see exactly what they are working with. Since we monitor and understand the ins and outs of your inventory, we also earmark cash for these much needed purchases, so you are not deciding between paying bills and moving ahead by paying suppliers for more products.
There are a few alternatives to just having a ton of cash hanging around. First and foremost, you will need to maintain good relationships with your suppliers. After all, they are a key element in your revenue stream. If you can negotiate really good terms that allow you to get orders started without a massive upfront cost, you can be in a much better spot, cash flow wise. Be clear (and reliable) about payment expectations, though. No one wants to have unsold inventory sitting in their warehouse waiting on your “get out of jail” payment to actually receive it.
There are some alternative funding mechanisms if having terms isn't doable. Things like debt financing, cash flow loans, etc. can work for you in a pinch. Depending on the position of your business, the interest rates can be high and the repayment terms can be overwhelming if you are not going to make enough money to pay back the loan easily with your expected sales revenue. Again - the key to making these decisions is in accurate reporting and forecasting, so you can plan better and don't get into a bind financially.
Fit It Into The Business For the Best Results
We can say it again, but it is already pretty well understood at this point: inventory management is complicated. It’s OK (and in your best interest) to get help if it's not your forté. Look at all of the factors that need to be considered in just buying inventory to sell. At the heart of business success is having proper bookkeeping methods that provide current data, so you have accurate reporting from which to make decisions from, in addition to systems in place that help you manage your forward progress without hours upon hours of manual entry. With Accountfully working on this, you can be free to manage your next move, maintain positive supplier relationships and grow your business with confidence, without scrambling for cash at the last minute.
Ready to turn over the hard stuff to Accountfully and outsource your accounting? We're ready to handle all of your inventory challenges.