Your product is your most valuable asset, regardless of whether you sell snowboards, plumbing supplies, chocolate, or body care necessities. As a product-based company, you are focused on controlling the costs of producing, shipping, storing, and delivering your products to your customers while also ensuring that they are distinctive, of high quality, and marketable.
The stock of products you sell is called inventory, and it can include packing materials, partially finished products, and raw materials.
The process of making sure you have enough inventory to meet customer demand, investing in new production, and selling your inventory at a profit is called inventory management. The processes involved in producing your product and getting it to your customers are also included.
Inventory control goes hand in hand with cash flow. Maintaining profitability necessitates carefully deciding how to invest your working capital in inventory.
We’ll talk about some of the main costs of inventory, how to manage those costs, and how a business line of credit can help you solve those problems in this article.
The cost of managing your inventory When you run a business that sells products, the majority of your day-to-day activities are devoted to developing and enhancing your methods and strategies for managing your inventory. As your business grows and adapts to seasonal shifts in sales, there are numerous factors that influence how much you need to spend on inventory. These factors are likely to change.
When you make an investment in inventory, you typically pay for more than just the item itself. To optimize your inventory management strategy, it is essential to comprehend all costs associated with your inventory.
A good place to start is with your cost of goods sold (COGS). This number includes everything your company spends to make your product. Your COGS can be found listed on your income statement, or you can calculate it yourself by using the COGS formula.
Costs associated with COGS and the acquisition of inventory in general include:
Costs of manufacturing: the prices of the labor and materials required to make your products.
Costs of holding or carrying: the cost of keeping stock in a warehouse until it is shipped to a retailer or sold to a customer or both.
Costs of landing: the costs of shipping and freight, as well as import fees, taxes, duties, and other costs related to moving inventory.
Costs of distribution: costs associated with transporting your product from the manufacturer to retailers or customers. This can include the cost of marketing and advertising and is typically not included in your COGS calculation.
Problems with managing inventory One of the most significant challenges that product-based businesses face is bridging the gap between investing in inventory and receiving payment for it. Depending on your business model, it may take months to see sales from purchased inventory cover inventory costs.
The sales cycle of direct-to-consumer brands is distinct from that of wholesale and B2B businesses.
When it comes to direct-to-consumer brands, seasonal launches might necessitate paying for a product months before it goes on sale.
When working with third-party distributors, wholesalers frequently have to wait for both the distributor to be paid by retailers and the retailers to be paid by the distributor. There is frequently a delay between receiving a customer’s purchase order (PO) and receiving payment for B2B businesses.
Additionally, businesses must keep in mind that they must have enough inventory to satisfy demand; however, purchasing too much inventory can increase holding costs and have an effect on future cash flow.
Using a business line of credit to solve problems with inventory management It is possible to master the ongoing balancing act between inventory management and cash flow with the right resources. Inventory financing is one way that businesses deal with the problems that come with managing their inventory.
A short-term loan or line of credit known as inventory financing is used to pay for the initial costs of purchasing inventory or investing in expenses related to inventory, such as manufacturing supplies or storage space. Most options for financing inventory use the inventory itself as collateral.
When it comes to financing inventory for a small business, business lines of credit are the best option.
A line of credit, in contrast to a loan, is replenished when the balance is paid back. As a result, you will always have access to the funds you need to cover the initial cost of inventory. You can use the credit that is now free to purchase your subsequent batch of inventory and pay off your credit line when you sell the inventory and receive cash.
By financing your inventory with a line of credit, you can keep your cash flow stable and make sure you have enough stock to meet your customers’ needs. As you approach your busiest times of the year, it can also assist you in bridging seasonal sales gaps and purchasing additional stock.
You can maintain good standing with your suppliers by using a line of credit, which could potentially raise your business credit score.
Check out how Ponce de Leon, a retailer of musical instruments, uses a line of credit to get discounts for early payments and stock unique, high-ticket products in their music store business.
