How to Free Up Cash From Your Inventory
If you’re an ecommerce retailer, managing the relationship between inventory and cashflow can be a challenge
This article aims to guide you through the practical and financial steps to freeing up cash.
Table of Contents
Ecommerce businesses, much like traditional retailers, are limited in their ability to scale by their stock investment requirements. Listing products as ‘out of stock’ makes them unlikely to sell, while falsely marking things as ‘in stock’ only to delay the customer’s delivery can lead to disaster. Even the most successful of sellers with constant customer demand must have a system in place to keep stock flowing.
However, most ecommerce businesses find themselves in a common position where their cash flow is tied up in stock purchases and can’t be ‘released’ until they sell sufficient amounts of inventory. This can lead to issues if you need to raise finance outside of your standard stock purchasing cycles - such as if you want additional finance to start a new product line or double your volume ahead of a busy sales event.
With so much of your capital tied up in stock/inventory, you may lack liquid funds. Many ecommerce business owners can, as a result of this cash gap, face steep challenges when it comes to investing or diversifying their operations.
If you already have significant reserves of unsold stock, there are lots of ways to utilise your inventory levels in order to generate cash flow. From discounting lines to raising new finance agreements against the inventory value, you have plenty of options. However, not all of them are a good decision. Liquidating your inventory, for example, might generate short-term cash but means you’ll have cut your profit and potentially harmed your future growth.
Let’s take a look at all of the ways to free up cash from inventory. As ecommerce finance brokers, we speak to businesses that have taken many of these different steps to varying degrees of success - so we can even help advise you on the right choices if you face a stock/cash flow challenge…
Evaluate & track inventory
Your inventory’s unit price isn’t the entirety of its cost. The ‘Costs of Goods Sold, or COGS, is a calculation based on purchase price, freight in and any duties or fees. This COGS price is what you must bear in mind throughout this guide and whenever you’re trying to work out the value invested into your inventory. It may also be worth including in your margin calculations - especially if you’re going to need to liquidate by selling at a discount, since unit price alone won’t give you a true picture of how much the inventory cost.
The Pareto principle states 80% of a business’ value is typically tied up in just 20% of its products. By understanding the relationship between your priciest stock and cash flow, you can reassess the way you run your business.
The ABC rule redefines inventory based on three categories:
- A: business-critical and require careful control
- B: items of average importance, only some management required
- C: items of least importance/slowest sellers/minimal inventory control
Assigning categories means you can prioritise stock purchase cycles. Running out of ‘A’ items will be more important than ‘C’, so you can ensure you put more funding towards ‘A’ while growing ‘C’. ‘A’ items should always be the ones you prioritise in terms of stock purchases and managing lead times. However, try not to overstock your ‘A’ items, as that will add a storage overhead and could be more costly (as ‘A’ may be your more expensive items).
Negotiate with your supply chain
You may be able to negotiate a consignment agreement with your supplier. This is where you can buy inventory and only pay for what you manage to sell, with any excess stock or unsold inventory free to return. This system is ideal for launching new lines where you’re not certain of customer interest - though it often carries additional costs in terms of freight and logistics.
Regardless of whether you can sell on consignment, most of your suppliers can still help you release some cash value from inventory - even if they don’t know it. That’s due to the fact that many suppliers offer an early-payment discount/late-payment fees: both of which can impact your final stock margins and cash position. If you can pay early, you can unlock more cash value. If you’re not in a position to make an early payment, you can raise ecommerce finance to ensure you get this discount and then use the profit to repay your loan.
Dropshipping is an extremely popular ecommerce technique where you don’t have to hold stock items, instead selling through your site and then passing them to the supplier for shipping. Dropshipping eliminates the risk of holding inventory, but it also carries lots of restrictions around shipping times, margins, customer satisfaction and much more. It is also a very crowded market as of 2022, making it hard to recommend.
Most issues with cash flow and inventory occur when you overestimate the demand for a product and have an excess in your warehouse. To try and avoid this, create a pre-sales system that allows customers to register interest or even buy their stock early - perhaps even at a discount to entice the purchase.
Discounting at this stage may seem counterintuitive, but it’s worth it: knowing you have X amount of inventory sold before it even arrives gives you far greater visibility over cash flow and customer demand.
Branch into third party resellers
Some of the most successful ecommerce brands in the UK also work with resellers such as eBay and Amazon. Typically, they use these channels to move their used, refurbished and slow-moving product lines at a discount that appeals to the shoppers on said channels. Better still, these channels may offer marketing incentives or boosts to visibility that your own site can’t achieve without significant investment.
For example, if you have a stationary ecommerce site and find a backlog of a particular range of fineliner pens, you’d need to invest in specific paid advertising campaigns and search engine optimisation to draw fans of the brand to your site. With eBay and Amazon, you instead list the product in a marketplace that have their own internal search engines and brand categories - so the fans of said fineliner pens can easily find your products and purchase them.
Approach competitors or cross-sellers
When you’ve got surplus inventory and not enough cash, even your competitors may become your allies. While it isn’t a competitive technique, approaching your rivals to offer stock at significant discounts can be a good way to recoup cash. The benefits of this are simple: you already know that your competitor either stocks the product or works in your industry. While it may mean you lose out on having a competitive advantage, in dire circumstances this approach is viable.
Alternatively, a less ‘harmful’ concept is to identify sellers that stock your ranges as part of a larger offering. Think supermarkets and catalogue-style businesses that may offer everything from outdoor survival gear through to fine dining cutlery. These businesses may have the cash flow and capacity to purchase your stock at a discounted rate - with less risk compared to ‘shoring up’ your own sector’s direct competitors.
Check for technical errors
When certain stocks items aren’t selling, or you have surplus inventory, you should check the technical elements behind them to ensure they’re all as they should be. This includes pricing, SKUs, your website’s product pages etc.
You may also need to hire a web designer to assess your checkout process, as some ecommerce websites struggle to sell stock simply through technical issues that occur during the buying process. In some cases, errors or issues aren’t the only worry: some ecommerce sites fail to sell based solely on having too many steps to complete the purchase. Simplify or streamline this by implementing features such as a guest checkout and multiple payment options like PayPal, Google Pay and Apple Pay. The fewer restrictions a customer faces when trying to buy, the more likely they are to purchase.
Inventory management strategies
Businesses with a keen eye for technological innovation can get ahead - especially ecommerce retailers who invest in a stock management system that can track your current inventory against orders.
We suggest going beyond the standard tools offered by many ecommerce platforms and instead installing a dedicated stock management system of your own. Dedicated inventory management tools can not only track your entire inventory, but also provide real-time information on new stock purchasing, outgoing sales, shipment status etc. If you host a large inventory in a storage facility, it may also be worth assigning a routine inventory audit process to keep all of your stock tracked and managed throughout the year, as well as to double-check your software’s calculations.
Intelligent online inventory management systems can range between hundreds to thousands of pounds per month, depending on your business’ complexity and the software itself. Some systems even require hardware installation such as shelf-edge scanners etc which will add to the cost.
Some lenders offer financing agreements based on using existing inventory as collateral. While taking on more debt facilities may seem counterintuitive, it may be crucial in funding the purchase of your high-value stock and keeping your business in a positive liquid position. Some lenders also offer financing secured against your intended purchase, where you’d be able to buy the stock and should issues occur the lender can liquidate the stock. Unfortunately, the terms and conditions are generally quite strict as the lender will only offer around 50-80% of the stock’s liquidation value.
A better option is to seek general ecommerce finance agreements via a broker. Our team at Rangewell, for example, can secure loans for your business that enable you to buy the stock you need or raise cash for other business purposes. These loans are typically secured against your personal or corporate assets and terms can be negotiated to suit your specific requirements.
Taking out a new credit facility when you’re sitting on unsold stock may seem like a backwards step. However, the additional cash this credit will raise can be used for all manner of beneficial activities: whether that’s investing in new advertising campaigns to sell the unsold stock or purchasing new inventory of your more popular ranges.
Liquidate ‘dead stock’
Some ecommerce retailers feel like they have to hold on to purchased stock long after it stops selling, hoping for another period of demand in which they can sell it. However, actually holding the inventory means you have cash value tied up in the product, but also potentially in storage/warehousing costs.
With an inventory management system like we’ve suggested, you’ll be able to identify this costly slow-selling stock or products entering the end of their life cycle/use-by dates. You can then look at the margin values and set a low ‘wholesale’ price to move the stock to a clearance retailer or other specialist.
Alternatively, charitable organisations often accept donations which can have some tax benefits that mean your stock liquidation is not entirely a ‘loss’. In rare instances, you may find that it’s more financially viable to simply write off stock that you can’t sell, freeing up space in your warehouse and allowing you to move on to a new range rather than pouring money and time into trying to sell it. When you do this, it’s worth assessing if there’s any other value in the stock you can extract (such as scrapping a range of electronic products and selling the raw materials).
Simplify product offerings and bundle items
Once you identify your slow-moving stock, you may find that some lines are too complex for customers to engage with. Clothing, for example, may present too many colourways or size options. Condense these if possible to simplify the purchase process, or bundle certain options together at a discounted rate.
Bundles are also ideal for approaching certain communities and resellers as a way to quickly liquidate stock. For example, offering a range of different kid’s outdoor hiking boots to a Cub Scout organisation at a heavy discount.
Implement a Just-in-Time system
While this won’t help those in a position of stock surplus right now, it is a method to consider once you have managed to sell some of your inventory and want to avoid the issue in future.
Implementing a just-in-time ordering system means you only order stock when a customer completes a purchase. This is a streamlined system, but one you need to manage very carefully to avoid frustrating your customers. You need to guarantee your supplier’s lead times so that the customer receives their order exactly when the delivery estimate states - and you should also list this practice somewhere on your site so the customer knows ‘in stock’ doesn’t always mean you’ve got it in the warehouse.
Investing in technology to automate this entire process is possible and will also make your operational life far easier. However, doing so can be costly as it may require changing lots of infrastructures. Rangewell’s ecommerce broker team can help negotiate a specialist ecommerce finance agreement to help your business grow.
Refinancing existing debt
Most ecommerce businesses have some form of loan in effect at any one time, whether it’s a commercial loan or a personal one. These loans are generally offered at varying rates and terms depending on personal circumstances or the business’ performance. If you’ve already taken multiple loan facilities out but need another cash flow injection, don’t just opt for yet another loan.
Instead, talk to Rangewell’s ecommerce finance brokers. We can work to refinance your existing facilities into a more manageable one, giving you more control over your cash flow and repayments. Refinancing generally involves a higher total loan amount in exchange for consolidated repayment rates and terms. If your money is tied up in inventory but you have no means of quickly generating new cash or selling stock, refinancing against existing loans is generally better than taking out any new personal loans.
As you may have noticed, the majority of points listed in this guide are more about raising cash ‘around’ stock than actually selling a surplus. There’s a simple reason for this: to avoid having to sell at a loss. While a lack of liquidity may be a difficult position to be in, we don’t want to recommend simply rushing to sell your stock. Instead, why not raise finance that you can use to regain liquidity without having to sell at a loss?
Raising a new finance agreement is a far more flexible arrangement that helps you generate cash, protect your current stock and fuel business growth. The ecommerce finance team at Rangewell are specialists in the sector and know which lenders offer the best rates and terms for your specific requirements.
If you’re struggling with cash flow, don’t panic and sell. Instead, get in touch with us for a no-obligation chat about your business and see if Rangewell can help broker an ecommerce finance agreement that gives your business the boost it needs.