One common area where I see cash tied up for growing DTC brands is in inefficient, slow-moving inventory. This week I’ll provide 3 tips for freeing up cash by improving your inventory efficiency.

As a brand grows, its inventory position also grows, increasing the likelihood of holding idle or slow-moving SKUs. In my experience, excess inventory is one of the most common cash flow killers for growing DTC brands. To avoid this common risk, it is essential to learn how to manage inventory. Today I’ll provide three tips for freeing up cash flow by managing your inventory more efficiently.

Tip #1 - Build More Supply and Demand Certainty

The more supply and demand certainty you have, the greater your ability to place smaller, more frequent orders and not risk stocking out. Placing smaller, more frequent orders with little to no safety stock buffer drives average inventory levels down and frees up your cash. On the flip side, in an environment of little supply and demand certainty, your brand must hold large safety stock buffers to avoid stock outs caused by demand and supply volatility. Large safety stock drives up average inventory levels and consumes your cash.

One way to build more supply certainty is to improve communication with your suppliers. Building stronger relationships and frequent two-way communication lines with suppliers will reduce planning surprises and increase the likelihood that manufacturing output and lead times align with your vendors’ promises.

One low-hanging fruit tactic in this area is having weekly or monthly forecasting and planning calls with your major suppliers. Giving them visibility into your forecasted sales and purchasing plans will allow them to anticipate future orders and increase their ability to meet your PO due dates.

Tip #2 - Improve Internal Demand and Supply Planning Synchronization

Efficient inventory management requires a synchronized link between internal demand and supply planning teams. Your brand’s supply chain team should be working in close collaboration with your sales and marketing teams to ensure tight alignment and synchronized demand and supply replenishment plans.

What does close collaboration mean? Continuous, frequent communication. Your supply chain, sales and marketing teams need to plan as a single unit. If they don’t, then it’s highly unlikely that you’ll ever have a balance between supply and demand. An imbalance increases the chances of supply outpacing demand, which means increasing inventory levels – which consumes your cash! In my experience, keeping these teams in sync always leads to more efficient inventory levels, which frees up your cash.

Tip #3 - Apply the 80/20 Rule to Your SKU Catalog

Not all SKUs are created equal. Applying the 80/20 rule in this context would go something like this - 80% of sales are driven by 20% of your brand's SKUs. My recommendation based on this framework? Streamline your SKU catalog by focusing on the 20% of top performing SKUs and consider discontinuing some or all of the 80% of SKUs that drive only 20% of sales. Limiting your active SKUs to mostly top performers with high sales velocities leads to lower inventory levels, which frees up your cash.

Three Ways We Can Help

At Free to Grow CFO, one of our specialties is helping growing DTC brands free up cash by reducing average inventory levels. Here are three ways we can help

#1 Visual Dashboards of Your Inventory Days and Cash Conversion Cycle:

We provide unlimited access to visual dashboards that measure cash flow health. Our 12-month trend visuals of your cash conversion cycle (shown below), including historical inventory days, helps you understand if recent decisions and operating results are pushing inventory days in the right or wrong direction. These visuals help us easily identify how changes in inventory efficiency are affecting your cash flow.

#2 Three-Statement Financial Modeling

Our team can model planned inventory purchases under different sales scenarios to help you see the impact on cash flow. We can also model various inventory debt financing products to determine how they can help free up cash during periods of significant inventory buildup.

#3 Recommendations on Inventory Planning Processes

We make recommendations on inventory planning processes that improve your inventory efficiency and free up cash. We've helped several brands implement a weekly cross-functional planning meeting, which focuses on increasing supply, demand, and cash planning synchronization and improves inventory planning decisions.

If you’re ready to learn more about how Free to Grow CFO can help you increase your cash flow through increased inventory efficiency, click here to book a free intro call.

Until next time, scale on!

3 Tips for Increasing Cash As You Scale