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Product Strategy for Cash Flow Performance
By Paet Hidalgo on July 12, 2012

With tighter credit requirements, dwindling profit margins and stiff competition, inventory-based companies have less room for error when it comes to generating cash flow; for many it’s become a real question of survival.

If you’ve been in business for a couple of years or more it’s likely that you’re doing a lot right, though most small businesses according to statistics, started out with more enthusiasm than formal business training and capital. This is especially true in the racing industry.

Analogous to finding that magical racecar setup that puts you out front, positioning your business to be competitive in the market place can come down to some very subtle tweaks.

Running a successful business usually requires all hands on deck, stretched to the limit just to keep up with managing inventory, fulfilling orders and handling customer service and bookkeeping; which leaves you with little time for strategizing on ways to improve things in your operation. But keeping your business on a successful course will require some troubleshooting every so often if you are to avoid seasons of flat line performance or eventual death.

The strain from cash flow challenges can cause fear and stress that ripples through a company eating away at the confidence of its owners, employees and eventually its customers.

As business owners many of us have been there, and when it happens there are predictable reactions that usually lead to drastic cost cutting, staff layoffs and insomnia. Ironically in these situations one of the last things to come to mind is the need to stop reacting and to get control over the situation. Investing a little time in developing pre-emptive strategies can help you create conditions for achieving more consistent cash flow throughout your fiscal year.

Race product-generated cash flow has a seasonal aspect and dependent on overlapping purchase cycles for replacement parts and equipment upgrades that fill in the gaps between consumable items and maintenance parts expenditures.

Performance Tweaks:

There are three often-overlooked data resources that can greatly assist you in your ability and effort to manage your cash flow performance:
1. Current Inventory
2. Sales Records
3. Projections

You may be surprised at some of the products that are in your current inventory and the amount of money tied up in what’s on your shelves. Putting together the right mix of products, investing in the optimum quantities and ordering stock according to a planned schedule can greatly improve cash flow.

Cash flow crisis can be caused by several factors, but some of the keys to improving cash flow are as close as your customer files. You can data mine your sales records to confirm what your customers are buying, when they’re ordering and how much they spend with you. Paying attention to your customer’s purchase habits can help you determine what products to carry, how much to have on hand and when.

The sales engine is like a race motor and managing cash flow is as important as tuning the flow of fuel and exhaust; regulating the timing and volume of the money leaving your business is just as essential as what the intake does to your company’s overall cash flow performance. What you learn from analyzing your inventory and mining your records for trends will enable you to make product projections. And among other benefits, generating regular forecasts will enable you to schedule orders according to sales cycles, stagger stock deliveries for when you need them, while helping your supplier with their production planning and product availability.

This is not revolutionary news, unless you were unaware of it. Most small business owners are genuinely surprised at how little strategy and planning they have put into their own product offerings, and very few consistently do inventory forecasting or focus on making product turns to optimize cash flow.

Product Turn:

For those unfamiliar with the term “product turn”, it is simply the action of selling inventoried products to recoup the initial outlay invested to acquire the product and the additional margin made on your markup. A high turn rate keeps money moving through your accounts, which then allows you to better synchronize purchasing to the rate of your product turns, ultimately tying up less cash.

Example: Let’s say you decide to start the selling season by stocking up on a 100 'widgets' and your purchase is influenced because they are usually in high demand and your supplier gives you a 5% price break at 100 units for a net cost of $195 per unit. So your outlay for the widgets is $19,500 and by year’s end you sell out of them with at a 40% markup over the regular wholesale price recouping your original $19,500 plus an additional $8,000 in gross profit. Hey, nothing wrong with that, $8,000 in gross profit generated from a $19,500 investment.

Hold on. If instead you passed on the 5% incentive, invested only $10,000 for 50 units, sold them out and purchased 50 more, by year’s end after selling out of the second batch you will have grossed $7,000 with the same 40% markup by essentially recycling the initial $10,000, thanks to the product turn.

This little tweak just helped you avoid tying up almost another $10k, while helping minimize the potential for excess inventory depreciating on your shelves. Be careful here. Note I have used “markup percentage” and “gross profit” to express my example, not to be confused with margin percentage, which is another article topic in itself.

Forming Your Own Product Strategy:

In addition to your bread and butter stock, it’s important to identify and categorize which seasonal products sell-through and at what time of year, and determine which ones are year-round producers. Along the way keep your eye open for a product or line that is hot or has potential to be a winner that you may be able to get exclusively.

Once you’ve identified, ranked and categorized these products you can start formulating your strategy to put together your best selection of products. With serious effort you will be able to establish a product mix that is designed to sell- through, with help from performers that come into play when other products slack off. And if you are disciplined to look beyond short discounts and can determine more efficient quantities to purchase with the goal of completing inventory turns you can improve cash flow even more.

Steps to Create a Better Product Mix:

1.    Start by setting a goal to improve your product buys. Set a little time aside each day for data mining your customer records. Delegate this as a group task where more than one person can contribute their opinion to help determine what inventory warrants investment, when and in what quantities.

2.    Scrutinize inventory sell-through records to identify products that have unjustly tied up cash by turning slow. And look for products that can replace poor performers based on what the market tells you.

3.    Avoid ordering products just because you can get a “good deal” on them, though you may be conceivably saving over what you used to pay for the stock, you may have to hang onto it and eventually discount the savings away.

4.    Purchase products that turn faster with higher sell-through potential (even if they have lower margins) to ensure that customers who visit your store don’t leave empty handed.

5.    Order good seasonal sellers to purposely bolster sales during specific periods when your sales have traditionally slumped.

6.    Be on the look out for that big demand product that hasn’t been picked up by everyone in your area. Having some degree of exclusivity on high demand items can help raise your bottom line.

Remember, winning teams seldom come together by chance. Take the time to use your staffing, insight and your historical data to establish a winning product mix. The better your product mix the higher the sell-through rate resulting in more frequent product turns. Smarter inventory purchases coupled with more frequent product turns will result in improved cash flow.

About the Author
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Paet Hidalgo is Managing Director & Chief Marketing Strategist for Performance Branding.
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