Winter holidays, back-to-school, summer vacation, or anything in between – most small businesses experience seasonal or cyclical ups-and-downs. You’ll have times when revenue flows in, followed by slower periods. An effective inventory management system, and the right financing, is a great strategy for dealing with these seasonal changes.
How do you set up an effective inventory management system? Find out with the five steps below.
The basics of business cycles
All businesses experience cycles of busy and slow periods. If you’re a service-based business, meeting demand during busier times can be as simple as increasing staff. Restaurants and shops have more staff on hand during the busier times of the day, for example, while tax preparers ramp up staff from January through April each year to prepare for tax season.
But if your business depends on the sale of goods, meeting customer demand during your busy cycles requires advanced planning and cash for inventory purchases.
The primary challenge, though, is that the months before your busy season may be relatively slow. This can lead to a cash crunch right when you’re ready to order more inventory. Ideally, these temporary cash-flow deficits would be covered by generous trade credit from your suppliers, an unused line of credit, or a business credit card. Whether you have these options available or not, an effective inventory management strategy can help you through the highs and lows.
5 steps for effective inventory management
When you have an effective inventory management system, your business can thrive in any cycle.
Here are steps to create your best strategy:
1. Analyze data from your business’s past cycles
Many small business owners are so busy managing day-to-day operations that they wait too long to perform an effective analysis of their seasonal cycles.
Take some time now to review your data. Make notes about your past seasons on:
- what sold well
- what you over-ordered and had to mark down, and
- what you ran out of and couldn’t restock in time to optimize sales
Getting clarity now means that you’ll be prepared when it’s time to order again.
2. Evaluate inventory-ordering periods against your forecasted cash flow
Create a cyclical map of your busy times, and for the months leading up to them. This will show you when you need to have funds on-hand to negotiate the best terms with vendors, and avoid panic-buying that can lead to overstock.
Depending on your business, you may have several busy seasons each year or you may have one primary season. The holiday season is when many retailers generate up to 80% of their annual revenue, but you might also have seasonal spikes for back-to-school preparations and holiday gifting. And if your business is sporting goods, you may have different cycles with varying costs, like skiing equipment in the fall and winter and biking-related goods in spring and summer.
3. Analyze your inventory
To develop the most effective inventory management strategy, break down your goods using the following steps:
- Review your product and category mix: Start by organizing your data so you can categorize items by sales volume and profitability. This will create the foundation of an effective road map. As you review your sales data, break down your inventory needs by perennial best-sellers and those items that are low performers that you still need to stock. Then, find the items that you can eliminate altogether.
- Simplify the number of SKUs: Using the information you’ve gathered, determine if you can narrow the number of SKUs you use to make it easier to manage your inventory. Simplifying your selection to the most sought-after products is a win-win for you and your customers.
- Review the lifecycle of each product: Note lead times for obtaining inventory, as well as the seasonality or shelf-life of your items. This will create a better inventory flow. You’ll avoid running out of best-sellers and over-ordering slow-selling items or those that will sit due to being out of season.
- Determine your cost of holding inventory: Figure out the inventory carrying cost in stock or in a warehouse – and don’t forget to include the financing cost of any debt that you used to purchase inventory. Knowing these added costs will motivate you to keep a tighter control on unnecessary ordering.
- Create alternative sales and delivery methods: If you have a brick-and-mortar shop, decide whether you and your customers would benefit from drop shipping and/or e-commerce direct delivery. Also, consider pairing products or offering bulk purchases, which can boost your average sales. These strategies can result in less stock and greater cash flow.
4. Negotiate with your vendors
Now that you have a solid plan and picture of your inventory, work with your suppliers to get the best possible terms. You can negotiate on:
- Ordering times: Set your product deliveries to be more or less frequently, depending on your needs. By doing so, you can manage your inventory more effectively and strengthen your vendor relationships. You’ll help them manage their production and inventory more effectively, too.
- Payment terms: Request longer payment terms that are advantageous for you. You could also consider shorter payment terms in exchange for discounts or preferential treatment when stock on your best-sellers gets low.
5. Assess your cash reserves and create stability with a loan or line of credit
Having enough working capital is always beneficial to your business, but it’s especially important as you prepare for your busiest times of the year. Projecting your funding needs and securing financing in advance will reduce your financing cost and boost your profitability.
If you don’t have cash reserves or access to lines of credit or trade credit, it often leads to using expensive credit cards, merchant cash advances, or other high-cost sources that erode your profitability.
If your cash reserves are low, talk with a lender right away to discuss working capital financing, such as a line of credit or a small business loan.
Your inventory management plan can help, too, as lenders will want to:
- Assess the inventory you have on-hand, including turnover rates and its value as collateral.
- Understand how adept you are at managing inventory throughout cyclical sales.
- Know that the cash they lend will improve your business’s growth and profitability.
When you’re prepared with an effective inventory management strategy, potential lenders will be impressed that you’ve got a handle on your inventory and working capital needs.
Pursuit has loans available to ease business cycles and set you up for success
Pursuit is a leading small business lender throughout New York, New Jersey, Pennsylvania, and Connecticut. We have more than 15 loan options and a line of credit that can help you meet your working capital needs and take the stress out of seasonal sales cycles. Get in touch with us to see how we can work together to grow your business.
