Buying inventory early can lower your purchase price and still make your cash flow worse. The question is how much cash you tie up, for how long, and what your business needs that cash to do in the meantime.
I was reviewing a conversation one of our operators had with a shop owner who had recently acquired the business. One detail jumped out at me.
The shop was buying blowers early to save a little money. But those purchases locked up cash, and the owner was worrying about making payroll. He also had an SBA loan hanging over him.
That is a miserable position. You made a decision that looked economical, and now you are wondering whether you have enough money available for the next thing you have to pay.
How can an inventory discount hurt cash flow?
The discount tells you what you saved on the purchase. It does not tell you what it cost to have your money sitting in inventory before you needed it.
My advice to the operator was to quantify that. How much money was actually tied up? How early were they buying? What was the financing cost? What else could that cash have been doing?
I did not have those answers yet. I wanted him to get them. There is a big difference between spotting something that looks inefficient and showing the owner what it means for his business.
A purchasing decision needs to make sense for the whole operation. Saving a few bucks on one order is not much comfort when you are sweating payroll.
Start with the cash leak you can actually explain
I wanted the operator to use the shop visit to find other places where the same thing might be happening. Then put the findings into a simple spreadsheet the owner could understand.
- What is happening?
- How much cash does it tie up?
- What does it cost?
- What would have to change?
Actual numbers where you have them. Clearly labeled estimates where you do not.
The point was to give the owner something useful. A model that showed where the operator saw cash leaking out or getting stuck, and how he arrived at those conclusions.
Who will make sure the new process sticks?
The other revealing moment came when the operator asked whether the owner had someone in the shop he could rely on as a leader.
The owner's tone changed. He had a shop manager who was good at doing the work, but he did not really have the person who could own operational changes and make sure people followed them.
That matters. You can identify a better way to buy inventory and still leave the owner responsible for convincing everyone, checking the work, and making the change stick.
I wanted the operator to connect those two problems. Here is the cash issue. Here is the process creating it. Here is who will take responsibility for fixing it.
If everything keeps coming back to you, I wrote more about that in why hiring a team does not always give the owner their time back.
When does a fractional COO make sense?
In this situation, I would want an operator who can investigate the problem, put numbers against it, and own the correction. Someone who can lead the work inside the business.
The proposed next step was a cash-leak model and a conversation about what it would look like for the operator to fix the issues. This was an opportunity we were evaluating, not a completed savings case study.
If you recognize the problem, get matched with a fractional operator who can help you understand where your cash is getting stuck and take responsibility for improving the operation.