Quick answer
Every dollar of unsold stock is a dollar you can't spend on wages, rent or tax. Manage inventory by measuring how many days it takes to sell, ordering to a rhythm rather than a gut feeling, clearing dead stock before it ages, and matching the way you fund stock to how fast it turns. Fast-moving lines suit a revolving facility; slow lines suit smaller, more frequent orders.
Key points
- Stock is the one asset that turns into cash only after a customer says yes, so every extra week on the shelf is a week of funding cost
- Days of stock on hand (stock divided by cost of goods sold, times 365) is the single number that links inventory to your cash cycle
- A small business can skip a year-end stocktake for tax if stock changes by $5,000 or less, but you still need to count it to run the business
- Dead stock rarely recovers its full cost: the earlier you mark it down, the more cash you get back
- Fund fast-turning stock with a revolving facility and slow lines with smaller orders, not one big term loan
A shelf full of stock looks like an asset, and on the balance sheet it is one. In the bank account it looks like a hole. Money that left your account to pay a supplier is now sitting in boxes, waiting for someone to want it, while wages, GST and rent carry on regardless.
That gap between paying for goods and being paid for them is where many profitable retailers, wholesalers and tradies’ suppliers run into trouble. This guide covers how to measure the cash your inventory ties up, how to loosen it, and how to fund it when you can’t.
How does inventory affect cash flow?
Stock changes cash flow in three ways, and most owners only notice the first.
- The purchase. You pay the supplier, usually within 14 to 60 days, whether or not the goods have sold.
- The wait. Between delivery and sale the goods earn nothing. You also pay to store, insure and handle them, and the stock can lose value as it ages.
- The sale. Even once a customer buys, a trade customer may take another 30 days to pay. Your cash comes back only at the end of the whole chain.
That chain is the working capital cycle: days to sell stock, plus days to collect from customers, minus days you take to pay suppliers. Stretch the first number and the whole cycle grows, which means you need more working capital to run the same business. Our guide to why profitable businesses run out of cash shows how this happens on paper-profitable accounts.
What number should I watch?
Use days of stock on hand. The sum is simple: take your average stock value, divide by cost of goods sold for the year, and multiply by 365.
| Item | Example figure |
|---|---|
| Average stock at cost | $180,000 |
| Cost of goods sold (year) | $900,000 |
| Days of stock on hand | 73 days |
An owner who sees 73 days should ask a second question: how many days of credit do suppliers give? If the answer is 30, the business is financing 43 days of stock out of its own pocket, every day of the year. Cutting stock days from 73 to 60 in this example would free roughly $32,000 in cash without a single extra sale.
Track it by product category where you can. A total of 73 days might hide a fast line selling in 20 days and a slow line that hasn’t moved in 200. The average tells you something is wrong; the breakdown tells you where.
Where does stock cash get trapped?
In most small businesses the trapped cash sits in a handful of predictable places.
- Dead stock. Lines that stopped selling but still sit in the books at full cost.
- Minimum order quantities. A supplier’s minimum forces you to buy six months of a product you sell in two.
- Over-ordering to chase a discount. A 10 per cent saving looks good until the extra stock takes five months to sell and ties up cash you needed in the meantime.
- Safety stock set once and never reviewed. The buffer you added after a supply scare three years ago is still there.
- Seasonal lines bought too early or too deep. Summer product still on the shelf in April.
A quick audit helps. Sort stock by the date of last sale and put it into bands: sold in the last 30 days, 31 to 90, 91 to 180, and older. Most owners are surprised by the value in the last band.
How do I free up cash from stock I already have?
Start with the oldest band and work forward.
- Mark down early. A 30 per cent discount in month four recovers more cash than a 60 per cent discount in month twelve, and avoids paying storage in between.
- Bundle slow lines with fast ones. A popular item with a slow-moving accessory moves both.
- Ask suppliers about returns or exchanges. Many will take back unopened stock for credit, sometimes with a restocking fee that is still cheaper than holding it.
- Sell to a liquidator or marketplace. You’ll get a fraction of cost, but cash now beats stock that never sells.
- Stop reordering the dead lines. This sounds obvious, but automatic reorders keep many slow lines alive.
Write off or provide for what won’t sell. Your accountant can advise on the tax treatment, and the ATO’s simplified rules let many small businesses skip a year-end stocktake if the stock value changes by $5,000 or less. Don’t take that as permission to stop counting: a business that doesn’t know what it holds can’t plan its cash.
How should I time my orders?
Order to a rhythm built on data, not on the day the shelf looks bare.
- Set reorder points per line. Reorder when stock falls to the quantity you’d sell during the supplier’s lead time, plus a small buffer.
- Order smaller and more often where you can. Weekly orders of $3,000 tie up far less cash than a quarterly order of $36,000, provided freight and handling don’t swallow the saving.
- Agree consignment or drop-shipping on slow lines. Someone else holds the stock until it sells.
- Keep an eye on lead times. Shipping delays force larger buffers. If you import, build the longer cycle into your plan.
- Negotiate terms alongside volume. A larger order for 60-day terms often costs your cash less than a smaller order on 14-day terms. See our guide to negotiating better supplier terms.
How should I fund inventory?
Match the funding to how long the stock takes to turn into cash.
| Stock type | Typical turn | Sensible funding |
|---|---|---|
| Fast-moving staples | Under 45 days | A revolving line of credit or overdraft that you draw and repay as stock sells |
| Seasonal build | 3 to 6 months, then a sharp sell-through | A short-term loan with a repayment date after the season; see funding seasonal swings |
| A confirmed large order | Fixed date, known buyer | A short facility repaid by the customer’s payment; see funding a large order |
| Slow, bulky or high-value goods | 6 months or more | Often stock finance or residual stock loans, or smaller orders |
The mistake to avoid is funding stock that turns slowly with short, frequent repayments. If goods take five months to sell and your loan is repaid weekly, the loan will outlive your cash coming in. Our page on funding stock and inventory goes through the options, and seasonal stock covers the timing issues.
Carrying too much stock for the next few weeks? Describe your stock position and we’ll tell you what fits.
A bank is often the cheapest source if you meet its criteria, and a revolving facility from your own bank suits steady trading very well. If your bank has said no or the facility is too small, there are other lenders who assess stock-heavy businesses differently.
What do lenders see in your inventory?
When you apply for finance, lenders read your balance sheet and bank statements for signs of how well stock is being managed.
- Stock rising faster than sales can suggest over-buying or slow lines.
- Large single payments to a supplier just before a thin month show the cash pressure cycle.
- Stock held as security is valued conservatively. Fashion, seasonal and perishable goods attract the steepest discounts.
- Consistent margins suggest you’re not clearing stock at a loss to raise cash.
Preparing a stock-age report and a short note on your reorder process often helps. It shows the lender you understand where your cash goes.
A worked example: the homewares retailer
This is an illustrative example. A homewares retailer with two stores turns over $1.2m a year, with cost of goods at about $720,000. Stock at cost is $240,000, so days of stock on hand is 122. Suppliers give 30 days.
The owner sorts stock by last sale date and finds $48,000 hasn’t sold in six months. Marking it down and returning some unopened lines to two suppliers recovers about $30,000 in cash over eight weeks. Reorder points on the top 40 lines go in, and weekly orders replace monthly ones for fast sellers.
Within a year, stock at cost drops to $190,000, which is 96 days. That’s about $50,000 of cash released, with no new borrowing. The owner also takes a small revolving facility to cover the peak before Christmas, drawn in October and repaid by January. Stock is funded by the facility only during the weeks it needs to be.
Common inventory mistakes that hurt cash
- Buying to the supplier’s price break rather than your sales rate.
- Treating stock at cost as if it were worth that in a hurry.
- Using one long-term loan to fund fast-turning goods, or short-term money to fund slow goods.
- Ordering for the peak season on last year’s sales without checking this year’s trend.
- Ignoring the stock on hand when you apply for finance, then being surprised by how a lender reads it.
Stock is tying up your cash: what are your options?
If the money you need is stuck in stock and the next supplier invoice is due, you don’t have to choose between a panicked discount and a missed payment. There are finance options built around how fast your goods actually sell, and which one fits is usually clear once someone looks at the numbers.
Our enquiry takes about a minute and doesn’t involve a credit check, so asking carries no cost to your credit file. Your details stay with us rather than being sent to a crowd of lenders, which means no wave of calls. A real person reads what you’ve written and phones you. The more accurate you are about your stock levels, sales pace and what you need the money for, the sooner the right option comes up.
Frequently asked questions
How much stock is too much stock?
There's no universal figure, because it depends on how fast your lines sell and how long your suppliers take to deliver. A useful test is whether your days of stock on hand is creeping up while sales stay flat. If it is, you're buying faster than you're selling, and cash is being converted into shelf space.
Do lenders look at my inventory?
Yes, in two ways. Your accounts show how much cash is tied up in stock and whether it's growing faster than sales. Some lenders also lend against stock itself, usually at a modest share of its cost or resale value, and they discount slow, seasonal or perishable lines heavily.
Should I take a loan to buy more stock for a big order?
It can make sense when there's a confirmed order with a known payment date, because the sale repays the funding. It's much riskier to borrow to build stock on the hope of demand. Work out how long the stock will take to turn into cash before you decide what kind of finance fits.
Do I have to do a stocktake for tax?
Not always. The ATO's simplified trading stock rules let eligible small businesses skip the year-end stocktake if they reasonably estimate that stock changed in value by $5,000 or less. Many owners still count regularly because inventory errors distort their margins and their cash plan.
What is dead stock and how do I deal with it?
Dead stock is inventory with no realistic prospect of selling at full price, such as discontinued lines, wrong sizes or expired items. Identify it by age, then bundle, discount, return to the supplier where terms allow, or sell it to a liquidator. Holding it for another year usually costs more than the discount would have.
Can I borrow against the stock I already own?
Some lenders will, particularly for goods that hold their value and can be resold, but you'll generally be offered well below the stock's cost. Perishable, seasonal or custom goods are often excluded. Stock finance is covered on our glossary and loan type pages.