The future is bright for many small businesses. According to research from Investment Property Exchange Services, 57% of Americans say they are willing to pay more to support local businesses, and two in three try to shop locally rather than at large retail chains.[1]

As consumer spending remains strong, small business owners are wise to prepare to capitalize on increased demand with the right products, at the right price, at the right time.[2] That means understanding how to plan inventory while maintaining clear visibility on liquidity and operational expenses.

Master A Financial Balancing Act

Understanding the complex relationships between inventory management, pricing strategies, liquidity, and operational expenses is crucial for business success. These factors are intertwined with each influencing the others in significant ways.

Effective inventory planning is often considered the cornerstone of a thriving business. The goal for most is to achieve a "Goldilocks" balance—neither too much nor too little inventory. Excess inventory could strain cash flow by tying up capital, increasing storage costs, and potentially forcing price reductions. Conversely, insufficient inventory (stockouts) might lead to disappointed customers and lost sales, which could potentially impact both current and future revenues.

A business's liquidity, which is primarily regulated by inventory management, directly impacts its ability to cover operational expenses and invest in growth. Your business needs to maintain adequate cash flow to meet day-to-day costs and also have the ability to capitalize on opportunities should they arise. That cash, in turn, could then be used to increase inventory and start the cycle anew.

Six Actionable Strategies to Optimize Operations

Armed with the knowledge of this interplay, here are six strategic measures you might implement to effectively manage these financial factors.

1. Elevate your inventory management.

Accurate demand forecasting is often paramount for inventory planning. Fortunately, small businesses can adopt robust, yet affordable, inventory management software and no longer need to rely solely on unwieldy spreadsheets and manual counting.

A modern system offers a variety of benefits to streamline your operations. Data integrated across all channels and locations provides a unified, real-time view of your inventory so you can manage stock levels and offer more accurate order fulfillment. With automated stock alerts, you can immediately replenish inventory when it drops below a certain threshold so you don’t run out of popular items. Advanced reporting and analytics allow you to tap into the power of historical sales data, uncover trends, and make informed forecasting decisions.

2. Consider the interplay between inventory and cash flow.

Finding the right balance between stock levels and cash flow is a delicate art. Consider implementing a just-in-time inventory system where you make fewer, more frequent orders that refill your stock only when needed to meet customer demands. This might allow you to minimize storage costs, respond nimbly to fluctuating consumer demand, and lower the risk of obsolete inventory that might eventually have to be discounted or donated.

However, remember that this approach may also have associated drawbacks. You might encounter higher shipping costs and less favorable payment terms, which can pressure short-term finances. You’ll want to weigh all the factors and talk to your financial partner about recommendations for managing cash flow.

3. Regularly review your pricing.

There’s a fine line between undervaluing your inventory and pricing yourself out of the market, which is why you need to leverage smart pricing techniques.

Consider starting with a competitive analysis to benchmark your peers’ pricing; you don’t necessarily have to automatically adjust your strategy to match theirs, but this insight could help you focus your value proposition. A slightly higher price might attract premium shoppers while reducing it could drive volume.

If you do need to cut prices on languishing merchandise, be selective. Targeted promotions and reductions might be a better way to preserve your profit margins and could better protect your brand than across-the-board cuts.

4. Keep operating costs in check to maintain profitability.

Controlling operating costs often helps maintain profitability, especially when managing inventory and cash flow. Regularly review your business's expenses, including labor, overhead, and supply chain costs.

Identify areas where you might optimize processes, renegotiate contracts, or implement cost-saving technologies. Small reductions in operating costs often add up to significant savings over time.

5. Don’t overlook the impact of demand on expenses.

While keeping an eye on cost control, be prepared for the expense implications of growing demand. For example, purchasing additional inventory may increase associated costs like storage, insurance, and shipping. Meanwhile, maintaining high levels of customer service at peak periods often entails hiring additional labor or covering overtime costs.

Take the time to understand and manage these demand-driven expenses to help maintain profitability and ensure sustainable growth.

6. Recognize the value of the right financial partner.

While many small business owners thrive on the customer-oriented facets of their organization, running a successful venture demands an equally keen focus on financial management. Fortunately, a banking partner specializing in small business operations can help with all your financial needs.

From providing tools for better cash flow management, to offering advice on balancing inventory investments with other operational obligations, a good banking partner will work alongside you every step of the way.

They also can suggest financial products to help smooth out the dips, such as a line of credit to help you gear up for increased demand, or a business loan to help bridge gaps in cash flow or finance larger capital purchases like technological upgrades, such as a feature-rich point-of-sale system, or store renovations.

Could you use a financial partner with this type of expertise? Contact PNC today