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Death by a Thousand Cuts: A Tale About Inventory Planning

May 12,2024

When it comes to running a business, there is a lot to get your head around. Staff, culture, product-market fit, advertising, cash-flow, profitability, planning, leases, customer satisfaction - the list goes on.

Yes, a lot can go wrong! I’ve been in business now for 27 years, including 18 as the owner of a company. I talk to a lot of other entrepreneurs, CEO, and senior execs, and the two challenges that keep coming up are:

  1. people-related issues,
  2. cash-flow issues

Now, with people, I’m going to have to leave that one with you! Human beings are fascinating creatures, and it takes a lot of skill and patience to build the right dynamics.

Cash-flow is a lot more scientific. Cash-flow issues can stem from many things, for example you don't have enough margin to start with or simply don’t have your business model right. It might even be caused by a global pandemic.

There is one thing that keeps coming up - inventory. Or more specifically, how optimised your inventory is, and the effect that has on cash-flow.

The silent killer

Your business cannot be successful if your inventory is poorly managed. According to the Small Business Administration (SBA), problems with inventory ranks among the major reasons small businesses fail. Poor management can often lead to inventory shortages and overages — silent cash-flow killers.

Most catastrophic, is that the business owner may not know it’s silently killing their ‘baby’.

Here’s some of the cuts that can bleed a business dry:

  • Bob orders 1,000 units of an item because that's what they ordered last year. Bob isn’t aware that they have undersold in that item, and they still have 600 left. They will now have 1600 units and they will need to discount them to move it. The result? CASH-FLOW CUT
  • Mary is told that cash is tight, so she under-orders for the new range as they were uncertain about sales this year. The range went so well that they ran out within a week, and the lead time was a month, so they lost all sales for that month. The result again. CASH-FLOW CUT
  • One of the 20 ingredients in a nootropic drink made by Healthy Treats was under order due to a formal error in their planning spreadsheet. The delay in getting the berry juice from Malaysia is 1 month. The product is not able to be shipped to supermarkets and service stations, losing sales and upsetting customers. You guessed it. CASH-FLOW CUT, not to mention DRAMA.

These are just three examples of thousands of little (and big) things that can drag a businesses cash-flow down, affecting profit and also taking up valuable time.

Effective cash-flow management requires a laser focus on all drivers of cash, in addition to your profit or loss. Rules of accounting define profit simply as revenue minus expenses.  However, a smart business owner understands the fact that even if you earned a profit, this is not the same as knowing what happened to your cash.

Know your numbers

It may now be easier for you to see how inventory planning and stock control factors into this. Many businesses have a large amount of their working capital tied up in inventory sitting on their shelves or in their warehouses.

In fact, in my business StockTrim, we can see by analysing customer data that on average, $750,000 can be accessed by following inventory planning suggestions we set out via our cloud subscription software.  

"Across the board 20-40% working capital can be utilised elsewhere in the business, creating a set of positive consequences." - Dom Sutton

Needless to say inventory planning is paramount. Many small businesses will drop data from an Inventory Management System into a CSV and apply formulas. Unfortunately, over 90% of these contain errors, either in formulas, typos, or assumptions.

For larger businesses, using a haphazard methodology does not stand up to scrutiny. They instead use large Enterprise systems with costs that are prohibitive to SMBs. That’s why SMB’s have ‘made do’.

Technology now exists that can read all of your inventory behaviours in the flash of any eye, update in real-time, and project out and plan your purchases based on variable lead times and locations.

And here’s the rub (and sales pitch!) - we’ve managed to bring this tech to SMB’s in a way they can afford it. 

For readers of this article we are offering a special 1 month free-trial of StockTrim with the code ‘CFLW’. Go to www.stocktrim.com.

Dominic Sutton is co-founder of StockTrim, a Kiwi business bringing affordable inventory planning to the world.