Stock is cash, so get a grip!

By Catherine Erdly

Without being too dramatic, your product business lives or dies by the amount of stock you have in the business – because stock is cash.

If you think about the products that you have in your business and imagine that they're actually piles of money, think about how much money is currently tied up in your business.

Taking this a step further, creating a stock budget that is linked to your sales target is an essential task for a retailer.

If you are feeling like there's not enough money in your business considering your topline sales, then I would urge you to take the time to look at how much stock you have got and whether or not it's actually in line with the amount that you're selling.

Here are five steps for you to map out a sales and stock budget – a method I’ve honed over 17 years working in merchandising for big retailers. My key objective within those teams was to devise ways to grow sales and to keep the stock under control – the latter in particular really helps with cash flow and is so critical for your business.

Step One Sales Target

As we discussed in the beginning of the article, having a sales target is key for managing your stock. The targets work best if broken down week by week (although if you’re limited on time try month by month). Over time you will instinctively start to know what a good or bad week looks like for your business and you'll be able to adapt quickly and effectively.

Step Two The Calculation

Once you have a sales plan, have a think about the amount of stock that you want to have in your business. This is usually calculated using something called the 'number of weeks cover'. This is a theoretical number based on a certain amount of stock that you are selling at the same rate. Here's an example. You have 100 units of stock, and on average you sell 10 units a week, so if that rate continued your stock would last you for 10 weeks.

How many weeks’ worth of stock do you want to have in your business? Big retailers aim to keep that number as low as possible. As a starting point, you could look at three to four months cover.

If, however, you do this calculation on your current stock and it's a lot higher than that, don't panic! Just start looking for ways to bring that number down over time. The smaller the week's cover that you have in your business, the more profitable your business will be and the more cash flow you will have in your business.

Step Three Multiply

Each week, you multiply the sales that you think you're going to take by your ideal cover. For example if you said I'm going to sell 15 units and I want 10 weeks cover then your stock budget for that week would be 150. Knowing the number of weeks’ cover allows you to shape your stock goal and you can continue with this formula for a whole year. During peak times, you will want to have fewer weeks’ cover. As you can imagine, 12 weeks’ cover based on your sales over Christmas would be incredibly high!

Step Four Discipline

Once you've gone through the process of assessing your stock levels and calculating your weeks’ cover, you have to stick to that goal. If you are overstocked one week or month, don't bring in new stock until you have cleared your stock down back to the level that you've decided to set.

This is going to be trial and error. The first time you try to do this you'll work through your ideal figures and of course the longer and the more often you do this, the easier it's going to be for you to really understand how to make your business more profitable.

Step Five Focus Your Thinking

Shift your mindset and start asking these questions which are actually just driven by having a stock plan. ‘If I've got too much stock, how am I going to clear it?’ ‘Am I going to clear out old stock?’ ‘Am I going to purchase new stock to drive sales?’ ‘Will that drive sales enough to clear out some of the old stock as well?’ ‘Do I need to have a clearance sale?’ ‘Do I need to write off some stock?’

This is the new way of thinking when making decisions about your stock and critically it should always come back to your stock plan!

Planning out your sales and stock in this way can have a transformative effect on your mindset, cash flow and ultimately, your gross margin.

Catherine Erdly can be reached via email, [email protected], or at www.futureretail.world where you can arrange a free, no obligation 20-minute discovery call.

Read the article "5 reasons to have a sales plan" here...