BUSINESS Purchasing, Inventory Management and Cash Flow Some Purchasing/Procurement Questions to Ask: Is it for resale (a counter/will call order or for a scheduled job) or for stock? Can I successfully substitute something that I already have in stock? How soon do I need it? Who has what I need? How fast can I get it? How confident am I that I can sell it? (How unique is this?) How many days’ sales does this quantity represent? Thus, the direct connection between purchasing and cash flow! Unfortunately, this practice is a two-edged sword that can ei- ther be a sensible cash management tool, or it can become a very dangerous game to play. Moreover, if you fragment and scatter your purchasing power, you also frustrate your opportunity for increasing your credit limit and earning higher discount levels from your preferred suppliers who have invested millions in inventory. The “Open to Buy” System Although beyond the scope of this discussion, if your business includes significant retail sales, you may wish to consider what is known as an open to buy plan. Essentially, this is a well-estab- lished budget calculation and planning tool that (typically used by larger retailers) installs discipline into your purchasing prac- tices. For most of our readers, this is probably not for you, but you should be aware of its existence. One step toward such a system is to establish an inventory budget and remain within its bound- aries. Strive to turn your inventory three to four times per year. Don’t Be Captivated by the Shiny Lure You’ll notice that price is not on the list above of procurement questions to ask. While price is certainly important, we too oſten tend to become mesmerized and even obsessed with this one factor at the expense of other important considerations. One of the more serious mistakes a dealer/buyer can make is to unnecessarily tie up cash by over-ordering just to get a better unit price. Unless your cash position is strong, avoid this trap and only order what you need, recognizing that there are always some exceptions to any rule. Try to weigh/balance all relevant elements before you make your final purchasing decision. Use 16 KEYNOTES OCTOBER 2019 What is the degree of obsolescence risk? (Is a new model to be released soon?) What’s the relationship between how long I will have to pay for this, versus how long before I can sell it and get paid? How profitable is this product for me? What’s my current level of inventory? (in stock, plus open purchase orders) Can I return it? Exchange it? Will restocking charges apply? What other inventory purchasing needs do I expect to have within the next 30, 60 or 90 days? How much room/money remains in my purchasing/spend budget? the list above as your checklist. Obviously, larger-dollar decisions deserve more thought. If you get stuck with excess inventory, try to work out an exchange with your supplier(s). It is sometimes worthwhile even taking a haircut on a return/exchange rather than sitting on dead in- ventory that’s tying up your precious cash. Suppliers are oſten more receptive at month- or year-end when salespeople are shooting for bonus-related numbers! When you pass by your inventory (whether in store, ware- house or in service vehicle), envision stacks of dollars, rather than boxes. Few things will kill your cash flow more surely than stale inventory! So, be certain to discuss this with whoever is in charge. Hint: Look in the mirror! Entering the Realm of Inventory Management As we begin to think about and answer the list of questions in the purchasing checklist above (and others), we cross the bridge from purchasing into inventory management. Obviously, these two topics are heavily entwined. Not having stock when you need it means risking loss of the sale, job or even customer, whereas having excess slow-moving/dead inventory means se- questering cash that is needed for working capital. Organizing Your Inventory Many individuals (and business owners) are pack rats and tend to save virtually everything for tomorrow, when we will surely need it. Unfortunately, too oſten, when tomorrow arrives, we can’t even find that special treasure we saved three (or was it more like five?) years ago. Purge your inventory oſten, and don’t save crap! WWW.ALOA.ORG
