Controlling cash flow is of vital importance to the health of a business. Not having cash can keep you up at nights. The following gives you insights to some of the issues that will impact your bank accounts.
Excessive amounts of inventory can really tie up your cash. Many people place large orders of inventory with the goal of not missing out on potentially profitable sales. They are afraid of running out of running out of best sellers. Managers must decide on an inventory level that balances the risk of running out of products with storage costs and the other negative aspects of holding too much inventory. By definition fashion has a cycle of salability. Trends evolve, seasons change, and customers desires shift. Unlike fine wine when this happens the inventory you have in your warehouse can lose value. In fact if you are not careful you may not even be able to get the cost of the merchandise when you sell it.
I worked for a company that once had a large inventory of colorful suede skirts. The inventory continually reduced in value and management was not happy with the offers they were getting for it. After several years they finally bit the bullet and agreed to sell them at $1 per skirt (a very, very, low price). When they went to ship the skirts they found them discolored from the lights and years in the warehouse and ended up having to give them away. While this is an extreme example it does highlight the issue of over buying. Buying inventory is a combination of art and science. But one thing is true. A small business is better off erring on the side of caution, as money is limited it is sometimes better to miss a few sales than losing money on the merchandise you do buy.
A small business involved in manufacturing must deal with overhead costs. These are the costs beyond wages and materials that you incur for maintaining a manufacturing operation. These costs include such things as rent, utilities, employee benefits, insurance, equipment depreciation and property taxes. It is enticing to have a big beautiful showroom and offices, traveling to Europe to fabric shows several times a year and advertising in every publication that approaches you. However since your money is limited (and quite frankly even if it isn’t) you should analyze these possible expenses using rigorous standards before you agree to spend on anything.
Small business owners that closely monitor cash flow will be able to pay their bills on time and build their credit. They will have the money to take advantage of opportunities that come up and will be in a much better position to weather the inevitable lean times that come up throughout the years.