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Costs and benefits of holding stock
To manage your stock successfully, you need to find a balance between the costs and benefits of holding stock. The costs of holding stock include the money you have spent buying the stock as well as storage and insurance. The benefits include having enough stock on hand to meet the demand of your customers.
Always keep in mind that:
- having too much stock equals extra expense for you as it can lead to a shortfall in your cash flow and incur excess storage costs
- having too little stock equals lost income in the form of lost sales, while also undermining customer confidence in your ability to supply the products you claim to sell
- having the wrong stock means lost income in the form of lost sales, write-downs and poor customer service.
Having the right stock and being able to sell it can lead to:
- increased sales
- new customers
- increased customer confidence
- improved cash flow
- new investors.
Finding the right suppliers for your business can reduce your stock control costs. Your supplier may be able to hold your stock, or ship it directly to your customers on your behalf. Your suppliers may also offer payment terms that can help reduce your stock control costs. For example, you could negotiate 30-day payment terms with your customers and 45-day terms with your suppliers. This would mean you wouldn't need to have any cash flow tied up in your stock.