Tips for Effective Stock Management

For many Fijian businesses, a large part of their working capital is tied up in stock. Stock refers to goods ready for sale, while inventory includes everything used in the business to produce or sell and from packaging to spare parts.

Managing that stock effectively is essential not only to keep your business running smoothly but also to support your cash flow and profitability.

There are 3 very good reasons to implement effective inventory management systems. Stock…

 

• Uses up cash
• Uses up space
• May lose value over time

 

Many people believe that buying the right stock at the right price is all that is needed for good stock management. However, just as important, is the time factor which can influence both cash flow and profit. The end objective with stock or inventory management is to ensure that when your customer is ready to purchase, you can supply the product at a time suitable to the customer.

You may hear the terms ‘inventory’ and ‘stock’ used interchangeably, and for many businesses they are. Stock is part of inventory and represents any goods that are ready and intended for sale. Inventory includes stock and all those other physical items you buy that will be consumed or used in the business and adding value to the finished product for sale. In this article we will use the term inventory from now on.

So, why is time important when it comes to managing your inventory? There are three main reasons:

 

Inventory uses up cash

If you spend $10 on inventory, that’s $10 less in your pocket unless it’s sold quickly.

If you sell that inventory the same day, you recover your cash plus profit, which can then be reinvested. This is the idea behind “just-in-time” inventory which means buying only what you need, when you need it.

However, if it takes five days to sell that inventory, you’ll need enough inventory to cover five days of sales. For example, if you sell $10 worth per day, that’s $50 tied up. You may have to use your own funds or borrow more, which increases your costs through interest or delayed payments.

 

Inventory takes up space

Inventory needs to be stored somewhere. How much space depends on the level of sales and how much time inventory sits there before it sells. In the cash example, we saw that if you sell your inventory the same day as it arrives, you only need enough space for inventory to cover one days’ worth of sales. However, if there is a time delay, for each extra day you will need another day’s worth of sales. In the example above instead of 1 item of inventory you need to find space for 5 items of inventory.

The more days it takes to sell your inventory, the more space you need and in Fiji, space isn’t free. Whether you’re paying rent in Suva or Lautoka, or using a small village shed, storage adds costs.

Rent is not the only cost. The inventory may also need temperature control, pest control, insurance, security, people to count it and move it and it may reduce efficiency if it gets in the way of other processes in the business. The more inventory that is held the more costs that may be incurred.

 

Inventory may lose value

Over time, stock may lose value or become unsellable. This can happen because:

• It passes its expiry date (especially food, cosmetics, or medicines)
• It gets damaged or spoiled
• It goes out of fashion or is replaced by new models
• It becomes obsolete or forgotten

 

With time increasing cash and storage costs, effective inventory control is essential.

 

Here's some practical tips for improving inventory management in your Fijian business.

 

Know your inventory turnover ratio

As a first step it’s important to monitor how fast your inventory turns over. The inventory turnover formula is:

Inventory Turnover = Cost of Goods Sold ÷ Average Inventory

 

This ratio tells you, on average, how many times you sell all your stock each year. If the ratio goes up it means you are turning your stock over faster, which is generally the desired result.

 

Another way to look at this ratio is to convert it into days using the inventory days ratio. It is calculated by taking the number of days in the year, 365, and dividing that by your inventory turnover ratio:

Inventory Days = 365 ÷ Inventory Turnover

 

This ratio will tell you, on average, how many days it takes to sell your inventory. In this case, the aim is to reduce the number of days as this may lead to holding less stock.

 

Understand your whole inventory journey

It may be helpful to be aware of the timing and other variables that may impact your stock holdings from the time you order the inventory, to when it arrives on your doorstep, how long it takes to get through your value adding processes to make it saleable and how long it takes to get on the shelf and into your customers hands.

This will enable you to understand the minimum length of your inventory’s journey and hopefully help you identify where that journey may be slowing down.

 

Plan with your sales budget or pipeline

The objective of a good inventory management system is to have only enough inventory to meet your expected sales. A good sales budget or sales pipeline should inform your inventory management system when inventory will be needed for sale.

 

Use an inventory management system

An effective inventory management system is one that shows you how much inventory you have, how long you have had it, where it is, at what point you should reorder it, how fast it is turning over and be integrated with your sales budget.

It is important to periodically check your physical stock against your system records to ensure it matches or to highlight any anomalies.

 

Buy less, not more

While a discount on a bulk purchase may seem attractive, is it enough to outweigh the cost of storing that bulk inventory and having your cash tied up until you can sell it?

 

Stop buying temporarily

A temporary solution to quickly reduce stock is to simply stop buying for a short period of time.

 

Review your product mix

If you sell multiple products, some might turnover faster than others. Look at slower moving items and consider whether it is worth the cost of holding it. If it is a product that brings customers to your business, who then buy other products, or if it has a high profit margin, then it may be worth continuing to hold it.

 

Limit variations

Every variation in size, colour and attributes can multiply the amount of inventory to be held. Too much choice may confuse customers and reduce sales.

 

Increase sales

Sometimes the best way to move stock is simply to sell more. Use promotions, bundles, or social media posts to boost sales. However, if you’re already doing this actively, focus on the other efficiency tips to avoid overstocking.

Efficient inventory management can improve your cash flow, reduce borrowing, lower costs, and boost your profit. It helps you focus on what truly matters which is serving your customers and growing your business sustainably.