Discover practical inventory management tips to help NZ small businesses reduce excess stock, improve cash flow and make smarter purchasing decisions in our article below.
Inventory Management: 4 Ways NZ Small Businesses Can Improve Cash Flow
Inventory management is about much more than knowing how much stock you have.
For many New Zealand small and medium-sized businesses, inventory represents a significant amount of money. When too much cash is tied up in stock that isn’t selling, it can put unnecessary pressure on cash flow. On the other hand, holding too little stock can mean missed sales and unhappy customers.
The goal isn’t to have as little inventory as possible. It’s to have the right amount of inventory, at the right time, for the needs of your business.
From a business value perspective, that’s an important distinction. How effectively you manage your inventory can have a direct impact on cash flow, profitability and the overall efficiency of your business.
Here are four areas I recommend NZ business owners look at.
1. Make regular stock checks part of your process
Stocktakes might not be the most exciting job for a business owner, but accurate inventory information is essential for making good decisions.
A physical stock check allows you to compare what your records say you have with what is actually on hand. It can help identify missing, damaged, expired or incorrectly recorded stock before small problems become bigger ones.
How often you should carry out a stocktake depends on your business. A business selling perishable goods may need to check stock much more frequently than a business with a small range of slow-moving products.
The important thing is to have a process that suits your business and to use the information you collect.
There are also New Zealand tax requirements to consider. If your business has trading stock, Inland Revenue requires it to be valued at the end of each income year, although there are specific rules and concessions depending on the circumstances. For example, certain low-turnover businesses with low-value closing stock may not need to complete a year-end stocktake.
So, don’t just think of your stocktake as an accounting exercise. Accurate stock information can give you a much better understanding of where your cash is going.
2. Identify and deal with slow-moving stock
One of the biggest questions I encourage business owners to ask is:
How much money is sitting in stock that isn’t selling?
It’s easy to think of inventory as an asset because it appears on the balance sheet. But if products aren’t moving, that money is tied up and isn’t available for other uses in the business.
Look at your inventory and identify products that are selling slowly or not selling at all. These are sometimes referred to as dead stock or slow-moving stock.
Once you’ve identified it, consider what makes commercial sense. Depending on the product and your supplier arrangements, you could:
Negotiate a return or exchange with your supplier
Offer a promotion or discount
Bundle slower-moving products with popular products
Sell the stock through another sales channel
Stop purchasing products that consistently underperform
The important thing is not to become emotionally attached to stock simply because you paid a certain amount for it. Sometimes, accepting a lower margin is a better commercial decision than continuing to hold stock that isn’t generating a return.
And when you release that cash, you can put it towards something more productive for the business.
3. Consider whether just-in-time inventory could work for you
Having plenty of stock on hand can feel safe. You don’t want to run out of a popular product when a customer wants to buy it.
But there is another side to the equation.
The more inventory you hold, the more cash you have tied up in stock, along with potentially higher storage, handling and other holding costs.
A just-in-time (JIT) inventory approach aims to reduce the amount of stock held by ordering products or materials closer to when they are needed.
For the right business, this can help reduce excess inventory and free up cash.
But JIT isn’t suitable for everyone. It relies on reliable suppliers, predictable lead times and a good understanding of customer demand. If there is an unexpected increase in demand or a supplier can’t deliver on time, having too little stock can create its own problems.
Rather than automatically trying to minimise inventory, look at your sales history, supplier lead times and customer demand to determine what level of stock makes sense for your business.
The right question isn’t “How little stock can I hold?” It’s: “What level of stock allows me to serve my customers without unnecessarily tying up my cash?”
4. Use technology to get better visibility over your stock
If your inventory is being managed through spreadsheets, paper records or someone’s memory, it may be time to consider whether there is a better way.
Technology can give you much greater visibility over what you have, what’s selling and when you need to reorder.
For many NZ small businesses, Xero can be a good place to start. Xero’s inventory functionality allows businesses to track stock levels, see what’s selling and add inventory items to invoices and purchase orders. It also provides information about stock value, helping business owners make better purchasing and cash-flow decisions.
For example, rather than discovering at the end of the month that you’ve run out of a key product, having better visibility over your stock can help you make purchasing decisions earlier.
Depending on the system you use, technology can help you:
Track stock levels
See which products are selling and which aren’t
Set reorder points
Monitor inventory value
Reduce manual data entry
Connect inventory information with your accounting system
For businesses with more complex inventory requirements, a dedicated inventory management system may be more appropriate. There are specialist inventory applications that integrate with Xero, allowing businesses to extend their stock management capabilities without losing the connection to their accounting system.
The key is to choose technology that suits the complexity of your business. You don’t necessarily need the most sophisticated system available — you need a system that gives you the information you need to make better decisions.
And remember, technology doesn’t replace physical stock checks. Even with a good inventory system, you should periodically check that the numbers in your system match the stock you actually have.
Look at inventory through a cash-flow lens
Good inventory management isn’t simply about keeping the shelves full. It’s about making sure your money is working as hard as possible for your business.
If you can reduce excess or slow-moving inventory without affecting your ability to meet customer demand, you may be able to release cash and improve the efficiency of your business.
That’s why I encourage business owners to look beyond the question of: “How much stock do we have?”
Instead, ask: “How much cash is tied up in our inventory, and is that inventory generating an appropriate return?”
That is a much more useful question when you’re thinking about the performance — and ultimately the value — of your business.
For NZ small and medium-sized businesses, improving inventory management doesn’t necessarily require a major overhaul. Sometimes it’s about getting better information, changing a purchasing habit, identifying stock that isn’t moving, or making better use of the technology you already have.
If you’re not sure whether your inventory levels are helping or hurting your business, talk to us. We can help you look at your inventory, cash flow and overall business performance and identify where there may be opportunities to improve.
Together we can achieve more.
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