Every ecommerce business holds inventory. Every unit of inventory is cash sitting on a shelf. The job of inventory management is to hold as little of that cash as possible, for as short a time as possible, without ever being out of stock on a product someone wants.
Done well, inventory is almost invisible to the finance team. Done poorly, it becomes the biggest single reason a profitable business runs out of money.
How a cash problem starts as an inventory problem
The typical pattern looks like this. A new product does well in its first month. The team orders more. Then a lot more. The next month, demand softens because the initial launch audience is exhausted. The warehouse now holds two or three times the stock the current sales rate can clear, and the cash that bought that stock is unavailable to fund the next product, the next marketing push, or the next payroll.
This happens because inventory decisions get made on a snapshot. Last month was good, so this month will be good. The decision maker does not have a forecast, or has one but does not trust it.
The three failure modes
Nearly every ecommerce inventory problem is one of three patterns:
- Overstock. Too many units of a product that is not selling fast enough to clear them. The cash is tied up for months. The product may need to be discounted later, further eroding margin.
- Stock out. The product is sold out when a customer wants to buy. The sale goes to a competitor. Return visits to buy the same SKU are a small fraction of first visits.
- Dead stock. Inventory that will not clear at full price under any reasonable scenario. Carries ongoing storage cost, usually ends in a markdown or write off.
All three waste cash. A healthy inventory operation produces a steady stream of small corrections to avoid each of them.
What inventory visibility actually looks like
A business with real inventory visibility is answering four questions on a continuous basis:
- For each SKU, how many days of cover do we have at the current sales rate.
- Which SKUs are at risk of going out of stock before the next reorder arrives.
- Which SKUs are projected to overshoot the holding target and tie up cash.
- What should the next reorder look like, in units and dollars, by supplier.
The data for all four of these questions is already in your business. The reason it is hard to answer them is that the data lives across your sales platforms, your warehouse management system, your purchasing records, and your finance system. Nobody has one view of all of it.
The cash conversion cycle, measured
The clearest way to describe the health of an inventory operation is the cash conversion cycle. It is the number of days between paying your supplier for inventory and getting paid by your customer for the sales of that inventory.
Days of inventory on hand plus days of receivables, minus days of payables. The lower the number, the less working capital the business needs to fund every incremental dollar of revenue.
Most ecommerce brands have a longer cash conversion cycle than they think, usually because days of inventory on hand are concentrated in a small set of slow moving SKUs that the average does not reveal. Measuring it by SKU surfaces the problem.
Where to start
- Pull last 90 days of unit sales by SKU. Calculate the daily run rate.
- For each SKU, calculate days of cover from current on hand stock.
- Flag SKUs with less than two weeks of cover and no reorder in flight.
- Flag SKUs with more than 120 days of cover and no clearance plan.
- Repeat weekly. Make the two flagged lists part of the Monday review.
That one practice, done every week, prevents the majority of inventory led cash problems. It does not require a sophisticated forecasting model. It requires one view, kept current, that everyone looks at.