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How stock holding and inflation will affect your cash flow

How stock holding and inflation will affect your cash flow

Louise Hastings

If your business processes materials or assembles goods for sale it will usually need to keep a stock of items to ensure that future sales can be met.

Ideally, stock levels should be kept to a minimum such that hard-earned cash reserves are not tied up unnecessarily. You will need to manage stocks to ensure you cover current production needs and considerations of lead times for replacing stock as well as being able to satisfy short-term demand.

Demand changes for a number of reasons can throw a spanner in the best laid stock management plans. You are left with excess or even redundant stock.

When prices are falling – in deflationary times – you will not want to hold excess stocks that could be replaced by lower cost items.

Alternatively, when prices are rising – in inflationary times – the opposite applies. You might benefit from investing in increasing stocks if prices for materials are rising, subject to redundancy issues and any costs of holding stock. For example, if lower cost alternatives enter the market, you may be left with redundant stock or suffer reductions in your profit margins.

Maintaining stock levels is a constant play-off between working capital and profitability. Unfortunately, external factors such as inflation and supply delays are causing chaos with stock management. The types of stock held will also significantly impact on whether it is possible to increase stock levels as many items will be perishable, be subject to fashion or trends or will have some other time-limiting factor.

The purchasing of stock and the factors involved will always cause a headache however understanding your cash flow and what different outcomes could mean for your business will allow you to prepare accordingly. Business are now increasingly using cloud tools for their cash flow planning.

Understanding your cash flow is now even more important for those unincorporated businesses affected by the basis period reform changes. The basis period rules for unincorporated businesses are being changed from the 6 April 2024, with a transitional tax year of 2023/24.

If your business is required to hold significant levels of stock and you are unsure how best to maximise the effective use of resources, please contact a Moore adviser who will be able help you consider the options available to you.