Taking stock – Are your customers stock levels a threat to your cashflow?Posted: Sep 6, 2020

There is a potential situation arising that could soon be causing some insolvency related issues, cashflow problems and it is a real danger to getting back into business as normal. We are starting to see a problem concerning stock levels. As the last of the summer fades and we all knuckle down and get back into the swing of things, it is easy to lull yourself into the false sense of security that the orders will soon be back in the in-tray. Those orders may not be back for a while though and that is clearly a danger to the financial well-being of any business. This is particularly true if you manufacture, import, distribute, or sell products because the pandemic created an interruption to the chain of supply and demand. The issue I want to focus on in this article is how much fallout there will be from that disruption and few thoughts on assessing your strategy to it.

For a supply chain that relies on products with a long shelf life it is a whole different story. Products that are intrinsic to areas such as clothing, construction, engineering, electronics and similar are facing a very different problem. In many cases, there is still stock sitting on shelves from the point of manufacture through to the consumer.

Let’s take a scenario of a small, specialist, engineering company typical of the industry in the Midlands, which is focused on the manufacture of a specialist component. At the point of lockdown and furloughing their teams, they would have probably had some stock sitting in inventory to anticipate customer needs. Their customers will have probably also closed their doors, so it is safe to assume they also have a stock on hand they will eventually need to replace. 

How much stock is still in the chain?

The problem here is that, as we have said before, this is not like coming back from the summer break and picking up after an expected slow period. This was unexpected so in contrast to the usual changes the demand has not simply reduced seasonally, it may have slowed to a trickle or even stopped entirely. With high stock levels already in the pipe, even when trade slowly starts again, some businesses could find those first orders weeks or even months away, so new production is now not possible or has a very slow return. Now add the common ebb and flow of seasonal demand into the mix and it is a recipe for disaster in terms of cashflow. Finally, as furlough ends the financial burden of paying staff to ensure you have supply potential you need could mean real insolvency problems. 

If you are potentially in that position it may be worth standing back and looking at the reality of the new supply chain before you rely on the old one. Here are a few suggestions that may be helpful. 

• Communication is going to be the ultimate tool against stock/supply problems. The more you know about the situation the better, so anything you can do in-house to streamline your own process will be adding money to the bottom line when you need it. Going it alone in planning your response will probably not be as effective as consulting with the people who do the production and your management team.
• Do not rely on the way it has always been done, because these are not the same circumstances. It may be that your old way of production and distribution are going to pick up where they left off, but do you really want to gamble on that? Taking a look at your processes in light of the new situation could well mean that you need to make changes. If it does you need to bite the bullet and make them, no matter how unpleasant they may be, if you want to survive the coming financially challenging times.
• Talk you your customer base openly about collaboration to meet everyone’s goals. Those nice clients you have been chatting to for years will not want to let you down in hard times. As a result, they may be too optimistic in forecasting their purchasing needs. You need the real situation. If you fully understand where you are with stock on both sides, then you can reduce waste and plan production.
• Is it time to consider a small (or perhaps major) pivot? The bottom line is that if your current production is unlikely to ramp up again until a dangerously distant point in the future, you will need to do something. Maybe now is the time to consider different markets?
• Speak to your accountant, your businesses coaches, your bank or an insolvency advisor. The most useful piece of advice we can offer is to take advice. Just an outside view will often clarify things.

If things are looking like it’s going to be a really rough time and you think you could be facing insolvency, then talk to us. The first consultation is free and whether it results in comforting reassurance, a rescue plan or an insolvency process, the sooner we start, the better your result will be.