Inventory Control for Better Cash Flow Management


Inventory - The first indicator of business health

Are you a trader or a manufacturer and are you stuck with a pile of inventory?

Many businesses find themselves in 2 situations:

  • They have huge quantities of raw material which cannot be used for existing orders
  • There is lack of adequate or enough material for executing orders on hand.
Let's take a look at why these situations arise in the first place.

The purchasing and inventory function should actually work in an integrated manner. But this happens very rarely.
Here's an example

  • The production department raises an indent for raw material based on the orders on hand.
  • The stores, based on rough estimate of stock level and sends a purchase requisition. The purchase guy just goes ahead and purchases the material.
  • Once the material lands in the stores, while actually issuing it for production, the stores guy realises that material has been ordered in excess but since his record keeping was incorrect, now there will be excess material for which money is blocked.

The first and foremost reason for this is improper record maintenance of inventory. Typically inventory is a grey area its susceptibility to manipulation is extremely high. Most businesses have manual records which are likely to be incorrect as there is no control over who can make changes to this data.

The second most common reason is neither the stores nor purchase bother to check the lead time ( time from order placement to receipt of material). So either the material lands in the shop much before it is required or gets delayed, hampering production schedules.

The third reason for inventory problems is that the specifications given for the material do not match. For example say a certain grade of steel is required. However, while ordering either a lower or higher grade is ordered. This leads to non-usability of material.

All the above reasons emanate from the fact that most of the business owners never analyse their inventory. So is there a solution to this ? Yes there is of course.

  1. The cheapest and most effective solution is to transition from maintaining manual records to digital records of every movement of the material. With software available at very reasonable rates, this transition becomes affordable for everyone and serves the purpose.
  2. Incorporating the lead time for each material within the software.
  3. Creation of stock reorder levels. Average inventory level required month on month needs to be defined for each major material and depending on the lead time the average reorder levels can be set within the system.
  4. Aligning the inventory with the sales order book.
  5. Controlling cost of purchase by comparing the landed cost of material.

Key Takeaways:
Effective control over inventory
Better working capital management
Availability of relevant material for order execution thereby improving production and dispatch schedules

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