Scaling a business is an exciting, nerve-wracking time. As your startup or small business grows, you’ll likely face big challenges, especially managing cash flow and inventory. When these two areas are off balance, it can quickly snowball into bigger problems.

Cash flow shortages can choke growth, while too much or too little inventory can destroy profits. Here’s how you can juggle both without losing your stride.

Get a Grip on Cash Flow

Think of cash flow as the lifeblood of your business. If there isn’t enough money coming in to cover what’s going on, things can get stressful fast. Staying on top of cash flow becomes especially important as your business starts scaling up.

Amazon’s early days demonstrate the importance of cash flow forecasting. The company focused on optimizing cash flow by negotiating favorable payment terms with suppliers, allowing it to hold onto cash longer and reinvest in growth. This approach enabled Amazon to scale quickly while minimizing cash shortages.

• Stay on top of cash flow forecasting: Regularly tracking your cash flow lets you see the road ahead. Use a cash flow forecast to anticipate upcoming expenses, sales fluctuations, and growth-related costs. That way, you’ll know if there’s a financial bump ahead or the right time to make a big investment.
• Build a cash cushion: Unexpected costs happen. A cash reserve covering three to six months of expenses can give you the breathing room you need during slow periods or unexpected emergencies.
• Negotiate with your vendors: It’s not just about getting a good price deal. See if you can extend payment terms or negotiate discounts for early payments to help smooth your cash flow.

Make Inventory Work for You, Not Against You

Inventory management is an art form, especially when your business is growing. You don’t want cash tied up in unsold products, but you don’t want to run out of stock and miss out on sales. Finding the right balance can make a world of difference.

• Lean on just-in-time (JIT) inventory: The JIT approach helps keep inventory levels low, so you’re only buying what you need when you need it. It frees up cash but requires dependable suppliers who can get you stock quickly when orders come in.
• Use technology to track your stock: Inventory management software can take a lot of the guesswork out by giving you real-time insights into what’s selling and what’s not. With the right tools, you can automatically track stock levels, set reorder points, and forecast demand based on sales trends.
• Categorize your inventory using ABC analysis: This method involves grouping your inventory into three categories: high-value items with lower sales frequency (A), moderate-value items (B), and low-value items that sell frequently (C). Focus on your ‘A’ items because they make up the bulk of your revenue, and make sure you’re not tying up too much cash in ‘C’ items.

Toyota’s Just-In-Time (JIT) inventory system is a well-known success story. By only ordering materials as needed, Toyota minimized inventory costs and freed up capital for other investments. This lean approach allowed the company to remain agile and respond quickly to changing customer demands.

Link Cash Flow and Inventory Management

Managing cash flow and inventory shouldn’t happen in silos—they need to work together. Otherwise, you could overstock during a cash crunch or be short on inventory when sales are peaking.

• Set reorder points that reflect cash flow: Make sure you’re restocking inventory to align with your cash flow situation. For instance, you might order smaller batches during lean times and go bigger when you have more cash.
• Forecast demand with data, not guesswork: Leverage your sales data to understand seasonal trends and anticipate spikes or slowdowns. This helps prevent overbuying during slow periods or running out during peak demand.
• Always include a buffer in your inventory budget: It’s smart to factor in a little wiggle room for unexpected demand spikes. That prevents scrambling for cash or stock when things don’t go as planned.

Find the Right Funding to Support Your Growth

Scaling often means your business will need more capital to handle increased inventory and other expenses. The right funding can help smooth out cash flow and keep you from growing too fast or too slow.

• Try invoice financing: If you have a lot of unpaid invoices, you can get cash advances on them to improve cash flow without taking on traditional debt.
• Consider a business line of credit: This can be a flexible way to manage cash flow dips, giving you access to funds when needed, whether for bulk inventory purchases or unexpected expenses.
• Look into equity financing for bigger moves: When you need significant capital, equity financing can help. Yes, it may dilute ownership, but it can provide the resources necessary for large-scale growth, such as expanding inventory significantly or entering new markets.

For example, BrüMate’s approach shows how using a business line of credit can provide the flexibility needed to manage cash flow during periods of high demand. By securing funding ahead of peak seasons, they could ensure they had enough inventory to meet customer needs without putting financial strain on the business.

Read about how BrüMate became a $100 million+ drinkware company by becoming an Ownerpreneur member today.

Avoid Growing Pains by Managing Risks

Growth is thrilling, but it comes with risks. To scale sustainably, keep these risks in mind and have a plan for handling them.

• Don’t grow too fast: It’s tempting to expand quickly, but overexpansion can lead to cash flow and inventory issues. Take it step by step, using accurate data to guide each move.
• Diversify your income streams: Relying on a single source of revenue is risky. Add new products, services, or sales channels to reduce your dependence on any one area.
• Stay prepared for economic changes: Not everything is under your control. Market shifts can impact sales and cash flow. Keeping a cash reserve and maintaining flexibility in your inventory strategy can help weather the storm.

Final Thoughts

When scaling your startup or small business, managing cash flow and inventory can feel like a juggling act. But with careful planning and the right strategies, you can find a balance that supports steady growth.

Keep a close eye on cash flow, adopt smart inventory practices, and align the two to work together. It’s all about setting your business up for sustainable success, one step at a time. Scaling is an adventure! Managing cash flow and inventory wisely ensures you’re ready to grow without financial roadblocks.

If you want to scale your business, we suggest you read our in-depth article on how to build a scalable infrastructure for long-term growth. To access more insightful case studies and business breakdowns, join Ownerpreneur.