Whether you sell snowboards, plumbing supplies, chocolate, or body-care essentials, your most important asset is your product. As a product-based business, you’re focused on making sure that your products are unique, high-quality, and marketable while managing the cost of producing, shipping, storing, and delivering those products to your customers.
Inventory refers to the stock of product you sell and can include raw materials, partially finished products, and packing materials.
Inventory management is the process of ensuring that you have enough inventory on hand to meet customer demand while investing in new production and selling your inventory at a profitable rate. It also includes the logistics behind manufacturing your product and getting it out to your customers.
Cash flow goes hand-in-hand with inventory management. Carefully determining how your working capital is best used to invest in inventory is crucial to maintaining your profitability. In this article, we’ll go over a few of the core costs associated with inventory, the challenges of managing those costs, and how a business line of credit can help you solve those challenges.
The cost of inventory management
When you run a product-based business, your operations revolve around developing and optimizing your inventory management strategy and techniques. There are many factors affecting how much you need to spend on inventory that are likely to change as your business expands and responds to seasonal changes in sales.
When you’re investing in inventory, you’re often paying for more than just the product itself. It’s important to understand all the costs associated with your inventory so you can optimize your inventory management strategy accordingly.
Your cost of goods sold (COGS) is a good place to start. This number includes all expenses your business incurs to produce your product. You can find your COGS listed on your income statement or use the COGS formula to calculate it yourself.
Some of the costs that are associated with COGS and inventory acquisition in general include:
- Manufacturing costs: The costs of the materials and labor needed to produce your goods.
- Holding or carrying costs: The cost of storing and holding stock in a warehouse until it is sold to the customer or shipped to the retailer.
- Landed costs: The costs of shipping and freight, import fees, taxes, duties, and other expenses associated with transporting inventory.
- Distribution costs: The costs of delivering your product from the producer to retailers or customers. This is typically not included in your COGS calculation and can include the cost of marketing and advertising.
Challenges of inventory management
One of the major hurdles product-based businesses face is filling in the gaps between investing in inventory and getting paid for it. Depending on your business model, it could take months to see sales from inventory you’ve purchased to cover the costs of that inventory.
Direct-to-consumer brands have a different sales cycle than wholesale and B2B companies. For direct-to-consumer brands, situations like seasonal launches might require paying for product months ahead of the time it will be up for sale.
Wholesalers working with third-party distributors often have to wait until retailers pay the distributor and for the distributor to pay them in turn. For B2B companies, there’s often a time lag between receiving a purchase order (PO) from a customer and receiving payment.
Businesses also need to keep in mind that they need to have enough inventory to meet demand, but purchasing too much inventory can increase holding costs and impact your cash flow going forward.
Solving inventory management challenges with a business line of credit
Mastering the ongoing juggling act between inventory management and cash flow is possible with the right resources. One of the ways businesses overcome the challenges associated with inventory management is with inventory financing.
Inventory financing is a short-term loan or line of credit used to cover the upfront costs of purchasing inventory or investing in inventory-related expenses like manufacturing supplies or warehousing space. Inventory financing options typically use the inventory itself as collateral.
Business lines of credit are the best option for small business inventory financing. Unlike a loan, a line of credit replenishes as you repay the balance. This allows you continuous access to the funds you need to front the cost of inventory. When you sell the inventory and cash flows in, you can pay off your line of credit and use the freed-up credit to purchase your next round of inventory.
Inventory financing with a line of credit enables you to stabilize your cash flow while you ensure that you have enough stock to meet the demands of your customers. It can also help you bridge seasonal gaps in sales and buy extra stock as you approach your busiest times of the year.
With a line of credit, you can also remain in good standing with your suppliers, potentially increasing your business credit score.
See how one of our customers, musical instrument retailer Ponce de Leon, uses a line of credit to get early payment discounts and stock unique, high-ticket products in their music store business.
Using Fundbox for inventory financing
Fundbox offers lines of credit that businesses can use to finance their inventory management and operational costs.
For example, a garden center might need to purchase extra stock ahead of their busy spring season. Using the line of credit, they can finance the cost of the inventory of plants and tools including warehousing, shipping, and even their increased greenhouse heating bill before they’ve made a sale. When the busy season hits, they can then use that incoming revenue to pay down the revolving balance and use those funds again for more inventory or to cover new opportunities for growth, like a mid-season marketing campaign.
Fundbox provides 12 and 24 week repayment periods with a consistent repayment amount so that you never fall behind on paying down your balance, empowering you to manage your cash flow even more consistently.
With Fundbox Flex Pay you can pay for inventory-related costs that you cannot put on a credit card (such as invoices to your suppliers) and have three extra days to pay.
Get the inventory financing you need to invest in the business while effectively managing your cash flow. Apply for a Fundbox line of credit to see if you qualify.
Fundbox makes capital available to businesses through business loans and lines of credit made by First Electronic Bank, a Utah chartered Industrial Bank, member FDIC, in addition to invoice-clearing advances, business loans, and lines of credit made directly by Fundbox.
Disclaimer: Fundbox and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.