Think of stock as fifty dollar bills piled up in your stock room. This is a good incentive to manage stock at every stage. Vital to this objective is knowing the sales cycle of your products, that is, how long it takes from when goods arrive until they are sold. The time goods are sitting in stock is called stock days. One way to calculate stock days using your financial reports is as follows:
Stock on hand ÷ Cost of goods x Time period = Stock days
Stock on hand means the dollar value of stock in store at a given date. Cost of goods means the direct cost of getting the goods ready for sale including purchasing, freight and store costs but not fixed overheads like administration, wages or advertising. Time period is the reporting period upon which you are basing the other two numbers.
Here’s an example. A business with $150,000 in stock at 30 June and cost of goods for the year of $400,000 has stock days of 137.
$150,000 ÷ $400,000 x 365 = 137
So on average, stock in this business takes 137 days from when it arrives until it is sold. Once you know this number you are then in a position to improve your stock management and work on shortening the cycle.
Know your stock
You may think this is a no-brainer and that all you have to do is sell stock quicker. If selling was that easy everyone would be doing it. The trick to shortening stock days is to carefully manage when the stock is coming in, as well as knowing when it is going out.
If you have a model supplier who knows your sales cycle and only supplies when you need it, that’s great. If not, you need to create your own system.
You need to know:
- what is selling;
- what isn’t selling;
- which items are slow moving;
- which items are obsolete;
- what the trends/seasons are;
- what your margins on items are; and
- what it is costing to store stock.
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Buy stock when it suits you, not the supplier
Many businesses buy when the sales representative calls in or if they are offered a discount. You should buy stock when it suits you and your needs, not those of your supplier. Discounts can be a big trap. Ask yourself why they are discounting. Do they know something you don’t? Is there a new product coming up that will supersede the sale item? You need to measure the cost of having that stock sitting around against the discount being offered. If it’s going to cause cashflow problems, perhaps it’s not worth it.
Invest in a stock management system
Stocktaking is a necessary evil. You need to check stock levels regularly, not only for tax purposes, but to know your profit levels.
There are literally thousands of stock management systems available which can reduce the need for manual stocktaking. These systems report on stock searching, stock receiving, bar-coding, special pricing, sales orders, picking and packing, dispatch register, order fulfillment, product specifications, stock usage and reordering requirements.
Obsolete stock can be a real hiding place for cash. It can be heartbreaking to have to sell items at a loss, but if they are going to sit there forever, you may as well turn them into working capital to spend on better selling items.
If you have good records you are also more likely to know just how much you are purchasing from suppliers. This puts you in a better bargaining position when it’s time to renegotiate.
Watch top performers
Finally, keep an eye on industry benchmarks. Good benchmarks should include stock days for the low, average and top performers in your industry. You will find the stock days of top performers are fewer than those of the others.
In a nutshell, shortening the length of time stock sits in your store room will free up working capital to spend on other things like advertising, salaries and expansion.
Has your business reaped the rewards of better stock management? What worked for you?