Maximise your cashflow
Effective inventory management allows companies to reduce their inventory by 10% to 30% on average. But what does this mean in monetary terms? What costs are connected to your inventory and how can a stock optimisation project reduce these costs? More importantly, how can effective working capital management help your business to thrive?
Before you can start releasing capital or reducing the cash invested in inventory, to optimise your approach to working capital management, it is important to understand what costs are related to your inventory.
If you are a stock-keeping company, many of the costs you incur are related in some way to the items in your warehouse. When mapping out these inventory costs, we limit ourselves to three important cost components:
Capital costs are the costs that a company has to incur to borrow money. Depending on how a company is financed, these costs can vary enormously. An objective way of determining the weighted average cost of capital is the so-called Weighted Average Cost of Capital (WACC). For European companies, this WACC is usually between 9% and 12% of the inventory value.
Space costs are defined as costs incurred from the moment the goods are received by the company until the moment they are sold. These storage-related costs can be calculated in two ways, depending on whether they are fixed or variable.
The third component of the inventory costs are costs related to risk. The largest part of this consists of the costs resulting from an out-of-date, but also insurance costs for fire or theft.
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