Last week, we explained the difference between cash flow and profit. Now, we’ll give you six top tips to improve your cash flow by reducing your inventory levels. We promise that implementing just a few of these tips will free up some cash, allowing you to grow your Amazon business more quickly!
These are general guidelines, and you should mold them to work for your business. Every business is different, but these are good starting points.
Eliminate Obsolete or Slow-moving Inventory
Everybody has items that just don’t sell. You thought the product would be a hit, but it hasn’t worked out that way. Eliminating slow-moving inventory allows you to invest your cash in better-selling products.
- Lower the price of your product to increase conversions. It might beat you up mentally to sell your product for little or no margin, but it is still less expensive than throwing it away.
- Use Amazon Product Listing Ads to boost traffic to your product page.
- Complete a thorough product page audit to see if you can boost traffic and conversions. It’s quite possible that there is no problem with the product,only an issue with your product page.
- Remove them from Amazon and sell the lot on eBay or Craigslist.
Lower Lead Times
You should list lead time as the time from placing a purchase order with your supplier to the time that product is received at Amazon’s warehouse.
Lowering lead times can benefit your business tremendously. A long lead time means that you have cash tied up in manufacturing or delivery stages of your supply chain. This is even worse than inventory sitting on the shelf because it isn’t available for sale.
We’ll be providing some tips in a future article of how you can lower your lead times.
Classify Your Products
As your business grows, you’ll have some products that outperform others. It’s just the way things work.
You should break your products into three groups, A, B, and C. The A products will make up 80% of your profit. The B products will be 15%, and the C products will be 5%.
The classifications will help you considerably when determining service levels, replenishment priority, etc. It is a good practice to make a spreadsheet of your items and include the corresponding inventory value. This highlights products that are not selling well.
Looking at your inventory in this manner can change the way you run your business. There is a high likelihood that you’ll find items that just aren’t worth your time any longer or simply tie up too much cash. Think long and hard about your “C” items because there may be a new “A” item out there, and you just need the cash to get started.
Think hard about your service
If you’ve ever said, “I just buy enough inventory to ensure I never run out,” then this tip is for you! Deciding on the right service level for each product can be difficult. There is a delicate balancing of inventory costs versus the cost of a stock-out.
You’ll never have a service level of 100%, and you shouldn’t have one. A service level that is set too high will lead to inflated safety stock and cash being tied up unnecessarily.
We typically recommend a service level of 95% for Amazon retailers. Your top products can be set at 98% or even 99% to ensure you don’t lose out on considerable revenue. It is a good idea to tie your service level to the product tiers you set up in tip 3.
Change your order cycles/quantities
If you have a 30-day lead time on your product, then we typically recommend ordering no more than 90 days of inventory at a time.
Ordering more frequently allows your inventory to turn over faster. This means you won’t have as much on hand, but you’ll have more cash to invest elsewhere. We aren’t recommending ordering every week, but you certainly shouldn’t be ordering once every six months, either.
Stop guessing and get professional
Inventory management isn’t easy, and it can have a major impact on your business. You can’t make the right decisions if you don’t educate yourself and have the right data on hand. There are several tools on the market, including Forecastly, that can help you project your product demand, so you don’t overinvest in inventory.
With the right data at your fingertips, it will be much easier to make inventory-related decisions and scale your Amazon business.
We’d love to hear what you are currently doing to improve your cash flow. What have you done to reduce your Amazon FBA inventory?