Money Tied Up In Stock
A Difficult Balance
Money tied up in stock can be a huge restriction on the ability of your business to use money in other areas.
It is a difficult balance to ensure too much money is not tied up in stock but that you have enough stock to supply your customers. Not having enough stock, might result in lost trade and sales.
Sitting on stock can be sitting on money, money that could be used more productively elsewhere in the business.
A risk for certain businesses, will be stock becoming outdated or even perishing. Will the stock retain its value or is there are risk the value or price will drop between purchase by your business and sale to the customer? Whilst it is tempting to buy larger amounts of stock if a lower unit cost is available for bulk purchase, is it a saving in the long run?
Of course, some businesses will have little or no stock at all. For example, a service business such as SV Legal does not have stock. The service and materials are provided electronically by the videos and downloads.
Toyota “Just In Time”
A factor on what stock levels should be kept, is how quickly and easily stock can be acquired. If it is easy and quick to get, you might keep your stock levels lower than other items.
Toyota famously uses a “just in time” model to ensure that they do not carry too much stock but certainly they place great reliance upon being able to get the materials they need reliably and in a timely manner when they need it. They do not want to have a large volume of cars manufactured without a level of certainty that they are needed to supply demand.
Amazon’s Huge Inventories
Amazon however, has a different market and strategy.
Its customers typically are spending a lot less than you would spend to buy a car and customers expect what they want to buy to be in stock and delivered quickly. To achieve that, Amazon has to have a great deal of stock sat ready to ship, to meet an order should one come in for that particular product.
You need to work out what is the best model for your business in terms of stock levels. Ideally, you want to keep the level low without risking damage to your business.
It will likely be a case of analysing sales to see how much has sold over a particular period and forecasting sales going forward.
Of course, making sure you get paid for what you supply is key and our courses teach you how to achieve that.