Much of the small business advice that’s out there is for individuals who run service based businesses. But what about those who sell physical products? What about their needs, like ensuring they always have money for inventory?
This is something I find myself thinking about a lot lately as I spend more time with designers and product developers. They are teaching me a lot about the cash flow needs of a products based business, and most importantly, the need for money for inventory so they can keep running.
What happens when you don’t have money for inventory?
When a products based business doesn’t have enough cash flow, it affects their ability to continue stocking their inventory. When they don’t have money from inventory, they either need to take it out of their own pockets or hit the business reserves. If neither of those are options, then the business runs the risk of coming to a screeching halt.
With that being said, there are options out there so that business owners can always ensure they have money for inventory.
Ask for half of a payment upfront.
If your products-based business takes wholesale orders from larger companies, you always have the option of asking for half the payment up front to help with inventory costs.
This is actually something I learned from my roommate who is a fashion designer for a local company. They show samples to retailers. The retailers then choose which items they want for their store and place an order for X amount. If they take half the payment upfront, they can use that money to start production and have enough money for inventory.
If they don’t take half the payment upfront, they run this risk of having to do what I previously mentioned. In this way, they can use some of the money for the current order to start the process of the same order.
Leveraging debt to do things like make payroll or buy inventory is nothing new. Companies have been doing this for eons in an effort to keep their businesses running.
Of course, this is easier said than done in some cases. First, you need to really know what you’re doing or you could run into problems. That’s why you should consult with your financial team before doing this.
Second, in the case of small businesses, it’s not that easy to get a line of credit from more traditional means. If that’s your experience, you may need to find alternative lenders or use credit cards.
Accounts Receivable Factoring
Accounts receivable factoring is also a commonly used option to get money for inventory when cash flow is low. What you do is sell your unpaid invoices to a factoring company who then pays them (minus a percentage which is their payment).
This is a good option to use when you have a ton of unpaid invoices or the payment terms on those invoices aren’t working out in your favor.
While cash-flow is important for every business, products based businesses especially need to keep an eye on it so they have money for inventory. With these options, product based businesses can ensure they have the funds they need to keep their inventory stocked.