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How much stock is too much stock?

How much stock is too much stock?
Thursday, September 06, 2018

As far as business challenges go, carrying too much stock may seem like a good problem to have. After all, your stock represents all of your future profit potential. But when your warehouses are filling up faster than your delivery vans, things can spiral quickly.

Having more stock than you need can result in serious cashflow issues for your business. So how much is too much stock?

The problem with carrying too much stock

The first point you need to consider is space. Once you order your stock you’re going to need somewhere to put it – and this doesn’t come free. On top of rental space to store your products, you’ll need to onboard staff to maintain it if there’s a lot of it.

If you have filled up all your valuable storage space with your current range of items, this also limits you when it comes to introducing more products to your existing range. This puts you in a box as it were if you want to upgrade or vary the merchandise you sell.

Overstocking is an expensive business that essentially means spending cash on something you haven’t sold yet. This leads to a very common problem faced by companies today – stock management cashflow issues.

As you know, cashflow often refers to the movement of money in and out of your business. If you have more money coming out of your business than there is coming in through sales, you’re going to have a serious problem meeting your bills and other overheads.

Stock management cashflow works in much the same way, but in reverse. If your stock is coming in, filling your storage space and employees’ time, faster than your orders are going out to customers, you are likely spending far too much on purchasing items than you are selling.

Depending on the nature of your business, keeping too much stock in storage too long could mean it becomes out of date or damaged while waiting to be sold. This is practically throwing money away and also puts a great deal of pressure on your sales teams to move the stock fast. So what can you do?

Work out how long your existing stock will last you

Your inventory turnover ratio will help you work out how long the stock you have in both the back and front of your business premises will last.

Say you own a shoe shop. The shoes you have in your store front and in your storage room together are worth £15,000 and your average annual turnover is £100,000.

To calculate your inventory turnover ratio, we would take your £100,000 turnover and divide it by your current inventory levels of £15,000. This leaves you with 7.

We’d then divide this 7 into one which is 0.14. This is then multiplied for all 365 days of the year – giving you an answer of 51. That means you have enough stock in your business to last you for 51 days.

Know when you need to cut down on stock

A high inventory turnover ratio can be either a good or a bad thing for your business. It’s fair to assume that if you have £15,000 worth of stock lying around, then some of it has been held by your business longer than expected.

All businesses large and small make stocking errors from time to time. There are a number of things that can cause this. Perhaps your supplier has a minimum order value or a new line you introduced was not as successful as you had hoped.

Whatever the reason, this is when organising your stock management cashflow ahead of time is absolutely critical.

If the new season means you need to move all of your summer stock fast or you’re simply running out of storage space, you may need to mark down your prices to try and shift your products. Offering a 20% or 40% discount will help draw more customers – and money – towards your business while dealing with your overstocking problem.

Stock management cashflow issues? Speak to your accountant

Stock issues can have a major impact on your business’s profitability and viability. If too much of your funds are tied up in stock that you are struggling or unable to sell, that means less money is available to fund your future growth.

To speak to the experts about your stock management cashflow issues and how we have helped other companies overcome their struggles, speak to the Panthera team today. Please call us on 01235 768 561 or drop us an email to enquiries@pantheraaccounting.com – we’ll be back in touch with you shortly. 

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