Balancing Inventory and Cash Flow in your Franchise: What You Need to Know

May 22, 2018 | General

When you’re starting a franchise that sells products, it’s exciting to receive your first shipment of inventory. All those boxes being delivered mean lots of profits. All you have to do is put your marketing machine to work and people should be flooding in to buy your wares.

However, if you spent too much on inventory, that means you won’t have enough cash left over for marketing, meaning nobody will find out about your new wares and nobody will come in to buy them. (Or, at least, far fewer people than you had originally anticipated.)

This conundrum happens to a lot of new startups. It even has a name: inventory imbalance. It’s when you order too much inventory and you don’t have enough cash flow to run your business.

Finding the perfect balance between ordering enough inventory and keeping your cash flowing smoothly so you always have enough money on hand to run your business is crucial for survival.

Some small businesses allocate a whopping 70 or 80% of their assets to inventory, usually because they believe the more stuff they have to sell, the more revenue they’ll automatically bring in. They also don’t want to put up the dreaded “out of stock” sign, lest customers shun them forever, so they try to make sure they always have everything in stock.  

However, overspending on stock puts a bind on your business because it interrupts cash flow, which is the lifeblood of your business. Strong cash flow is especially important to a brand new franchise, which is already in a naturally fragile state.

Overstocking  

A glut of inventory means you have too much money tied up in that one single aspect of your business and not just in the purchasing alone. There’s also shipping, sorting, stocking, storing and insuring all that inventory and if it isn’t moving, it’s also depreciating. Things get even worse if there is an expiration date on your inventory.  

All the money you spend on the various aspects of stock could be used elsewhere in your business, like marketing, payroll, various bills and other expenses.

Figuring out how much stock to carry, when to reorder stock and the finer points of keeping your shelves full will become clearer over time. There is no exact formula to follow when reordering stock. It largely depends on how quickly you can turn that stock into revenue.  

When a new startup purchases too much stock or fails to sell that stock fast enough, it’s an indication that the business process and infrastructure may be flawed.

Getting It Right  

Although you can never get exact numbers about how much inventory to order, there are steps you can take to minimize the risk of over- or under-ordering.

Supply chain management software

Let artificial intelligence handle it.

There are plenty of supply chain management software systems out there to choose from. A good one will “learn” your business. It will analyze your historical trends and create inventory buffers for you that theoretically should allow you to meet customer demand while also keeping your costs low. Don’t skimp on supply chain management software. It’s a worthy investment.

Schedules and forecasts

Having reliable mid- and long-term inventory forecasts are especially important if your inventory is manufactured overseas and is delivered by container ship. This can take months to schedule and receive shipments, so keep that in mind.  

Something else to keep in mind is seasonal fluctuations. Christmas is an obvious time of year for things like toys to see a surge in sales and summer will usually see outdoor gear take a jump in sales.

And don’t forget to be a weather watcher. If your inventory is shipped in from Asia, that means a typhoon is going to disrupt your shipments just as much as poor planning will.

Performance metrics

When talking inventory, these are the relevant numbers to watch:

  • Turnover – This ratio compares the cost of goods you have sold to the value of the remaining goods you have in your possession.
  • Turnaround Time – This is the amount of time it takes for an order you have received to leave your warehouse on its way to the customer.
  • Completion Percentage – This is how often orders get completely filled.
  • Punctuality – This indicates how often customers receive their orders from you on time.    

Tracking these metrics will help you in making your inventory forecasts and give you an indication about how healthy your franchise’s order fulfillment is.

The eye test

It’s not all about numbers on computer screens. Get into your warehouse or storage room and just have a look around. Talk to your employees about what they see fly off the shelves and what they see collecting dust. It will help you make your own assessment of your inventory levels and become more familiar with it.

Fortunately for franchisees, your franchisor should be able to help you with your inventory, as they’ll have that helpful historical information that is so crucial to making estimates about how much to order. If you haven’t yet decided which franchise to join, let FranNet help you with a free FranNet franchise search and consultation today.