Many small businesses in Kenya handle inventory. Though, this is not always done in the best form. Since inventory is closely tied to the day-to-day operations of your business, its influence on whether you make profit or not cannot be understated.
You need to stock up so you can have something to sale. Perhaps, you’re a manufacturer and need a concoction of raw materials to make your final product for sale. It’s all same. You can gain even more if you think of other ways your inventory can be useful to your business.
Stocking up can help you protect yourself against price changes in future. Just look at the situation with charcoal. Our Government is always too willing to regulate and solve the wrong problems. But derivatives markets will be in Kenya soon, so you may have another avenue to minimize the risk of your supplies getting more expensive.
Many entrepreneurs know that the simple act of buying in bulk can help you save money. This is how some end up having lots of stock. If you anticipate that business will get better, you can also accumulate stock early rather than wait for the moment itself. When your competitors will be making calls to this supplier and that supplier, you will be refining your marketing plan. Planning like this, and other ways, is underrated. It keeps you ahead in the game.
One half of entrepreneurs choose to believe that inventory are assets. Are you part of this group? They are not wrong. Invetory is classed as a current asset in the financial statements. And in some special circumstances can be accepted as collateral. Inventory is basically cash because it’s entire purpose is to be converted to that. If you’re a great seller then you’ll be happy to see stock.
Caution though, more banks and SACCOs in Kenya will prefer not to touch the stock of a small business. They don’t have to compute it in monitoring your working capital. It may be a current asset but it’s not really that easy to convert to cash. I think what we are taught or told about assets is wrong but I’ll save my opinion for another day.
Your invetory also comes with holding costs. You have to store it somewhere, you have to keep track of it against loss, damage and overstaying. All of that not only requires effort but also has a financial cost – that will reduce your operating profit. Holding more than enough stock can mean that your business is generating less return overall. That’s not good if you want to attract investors.
When you buy stock, you’re saying this is the best way to use this money at this time. There’s an opportunity cost to using your working capital money to buy in bulk, for example, than get a part time employee or give more oomph to your marketing. We saw this exact conundrum when it came to saving money in business for when revenue will be low. It’s an issue of investing that most small business owners don’t quite deal with. Banks refuse to lend investment money so owners stick to operations and incremental growth.0