Creating Cash Flow with Old Inventory

As a retail consultant, I hear this comment all the time from different owners of businesses. The phrase that should be used is "I'm not giving away my inventory." The proprietors of retail establishments are the most likely to report that business is struggling. It is unfortunate that the majority of retail store owners have no understanding of inventory. There are two purposes served by inventory. You are either going to profit from it or lose money doing it.

Creating Cash Flow with Old Inventory

In order to generate a profit, you must ensure that you have adequate inventory. However, having an excessive amount of inventory is a more significant issue than having insufficient inventory.

An excessive amount of inventory prevents your company from releasing necessary cash. It's also possible that your inventory will sustain additional damage as a result. The challenge lies in determining the optimal selling price for your inventory. Items that don't move very quickly take up valuable shelf space and cash that could be invested in other, more lucrative stock.

There will be times when you will be required to modify your pricing strategy. For example, let's assume your retail price is double your cost. In this particular illustration, you pay $10 for something that normally sells for $20. What should the new price be if it is an item that isn't selling very well or has been discontinued? I would discount it by 20% for the first one to three months, then by 50%, and finally by 75%. If you can only sell at a discount of 75%, then you will sell for less than you paid for the item. When marking down an item, cost should never be a consideration at all.

I can now make out the sound of you screaming. I will not be parting with any of my stock. You are approaching your inventory from the wrong angle. Change how you look at it. The price that a customer is willing to pay for your product accurately reflects its value.

Let's say, to use my example, that you sold your product at a discount of 75%. How much of a profit did you make off of selling that item? It's highly likely that your response was a loss of $5. This was based on a cost of ten dollars and a retail price of five dollars. That response is accurate to a certain extent. The answer that you earned $5 is the one that is most accurate.

You took something that wasn't producing anything at all and turned it into five dollars in cash. You can put that money and that space to better use by purchasing something that will bring you a profit. Frequently, a company does not have sufficient cash on hand to purchase the required quantities of the products that are currently selling the best. If you buy from the good sellers with the money you get from the bad sellers, you will make more than enough to cover your initial investment.

No matter how skilled a buyer you are, there will always be items in your inventory that are unsuccessful sellers. The important thing is to be aware of this and to take action before it ties up an excessive amount of cash and profit.

Taking care of your problem inventory will result in increased sales, which is an additional benefit. You will have customers who make it a habit to visit your shop in the hope of finding one of your sale items. Many of them are interested in purchasing your high gross items as well. If you take care of your problem inventory on a regular basis, the amount of money you have to markdown will be lower.

Maintaining an accurate inventory is essential to the success of your company. The most important thing is to take action on the things that are moving slowly or have been discontinued. In the long run, the impact of this on your bottom line will be positive.


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