How to optimize inventory and operations to match seasonal cash flows

Seasonal cash flows are part and parcel of business. Your revenue soars during peak seasons and dips during off-peak seasons in response to changing customer demands. 

Certain companies and products are more susceptible to these highs and lows than others. Think fireworks sales, ice-cream trucks, landscaping businesses and fancy dress shops. But most retail, ecommerce and hospitality companies experience cash flow peaks and troughs. 

To remain profitable in the face of fluctuating seasonal demands, you need to maintain sufficient stock levels during peak periods and avoid accumulating too much stock in off-peak periods.

How do you strike this delicate balance? By optimizing inventory and operations to meet customer demands while minimizing cost. And we’re here to show you how to do it.

What is seasonal cash flow?

Seasonal cash flow describes the fluctuation of your business’s revenue and expenses at different times of the year. It occurs due to seasonal changes in supply and demand, along with varying weather, market and economic conditions.

Hospitality businesses, for example, generally see an increase in sales during the summer holidays and annual events. Retail companies see sales skyrocket during holiday seasons as people shop for beach clothes and Christmas presents. 

How does inventory management impact cash flow?

Inventory management has a direct impact on your business’ cash flow — and poor inventory management has a range of negative impacts on your seasonal cash flow, from stockouts and lost revenue, to increased inventory holding and storage costs. 

Let’s consider each of these impacts in detail: 

Inventory holding costs tie up cash flow

Inventory holding costs are incurred from your unsold inventory (also known as overstock). They include fees associated with overheads, security, insurance and labor, along with depreciation costs, such as obsolescence or deterioration. 

Overstock ties up your cash flow in fruitless assets. This is money that could be spent elsewhere, such as marketing, product development, or technological innovation. Even if you discount surplus stock, you’re still losing money, so it’s best to try and avoid it entirely.

Stockouts lead to lost sales and revenue

On the flip side, you want to do everything you can to prevent stockouts.

Stockouts refer to in-demand inventory items that are unavailable (i.e., out-of-stock). This typically happens when businesses fail to accurately predict demand, leaving customers unable to purchase the products they want. 

The consequences can be dire. The total annual cost of stockouts is $1.2 trillion, which is significantly larger than the cost of overstocks.

Why are stockouts so expensive? Well, if you can’t meet customer demand, your customers will turn to your competitors, which can lose you lots of sales. And, if your items are regularly out-of-stock, it can damage your reputation and result in long-term revenue loss.

It’s no wonder, then, that reducing stockouts is an inventory optimization priority for 62% of businesses.

Excess inventory results in added storage costs 

The more inventory you have, the more storage space you’ll need. And with more storage space and inventory comes additional labor expenses, admin fees, higher insurance costs and overheads. 

Having extra storage space isn’t a problem if your products are flying off the shelves. But, if they’re not, surplus stock will incur mountains of unnecessary storage costs that eat into your revenue. Remember, your excess inventory limits the space you have available for new, in-demand stock.

Inventory turnover rate impacts the cash conversion cycle

Inventory turnover rate expresses how quickly—or slowly—your business sells and replaces inventory over a specific time period. 

The cash conversion cycle (CCC) expresses how many days it takes your company to convert the cash spent on inventory into a cash return. 

These two metrics are directly related. If your inventory turnover rate is high (meaning inventory is sold and replaced quickly), then your CCC will decrease. A low CCC indicates you have an efficient inventory-to-sales process and a healthy cash flow cycle. 

Low inventory turnover rates increase your CCC. The higher your CCC, the longer it takes you to claim cash back from inventory, slowing down your sales cycle and causing cash flow issues.

How to optimize operations to match seasonal cash flows 

Now, let’s discuss some practical strategies to optimize your inventory and operations. 

Predict sales fluctuations based on historical data and trends

The ebb and flow of your sales can be understood by analyzing historical sales data and trends. These tell you which products sell out quickly, which generate lots of overstocks, and the relationship between these sales fluctuations and seasonal conditions. 

All this provides a better picture of sales patterns and customer behavior trends throughout the year, unlocking insights that you can leverage to accurately predict sales fluctuations.

To do this, you’ll need access to sales data. You can get it from a variety of sources: CRM software, point-of-sale systems, ERP software, and ecommerce platforms, for example. 

Utilize dynamic pricing to match supply and demand

Dynamic pricing involves adjusting the price of products based on real-time customer supply and demand, along with competitor prices and other market conditions.

In essence, you’re adjusting the price to reflect the product’s current market value.

Let’s say you’re a retailer specializing in outdoor recreation. You might raise the price of tents and bicycles during the warmer months when demand is high and lower them again during colder months. This strategy maximizes revenue and reduces the risk of stockouts and overstocks. 

Leveraging dynamic pricing software is a consideration here. These tools use advanced pricing algorithms to automatically optimize prices for you. 

Bear in mind that suppliers may increase their prices during peak periods, too, to reflect manufacturing costs and raw material availability. A business invoicing system can help you remain profitable during supply changes. 

These solutions keep track of incoming payments, help you manage purchase invoices and suppliers, and provide instant access to rich, real-time insights that inform your dynamic pricing strategy. 

Identify peak and off-peak seasons to adjust inventory levels 

Using historical sales data, identify which seasons experience the most and least amount of customer demand and sales. These are your peak and off-peak seasons, and they tell you which times of the year you need to increase stock, and when you need to reduce it. 

Increase your inventory levels during peak periods to guarantee you have enough stock to meet escalated customer demand. Just be careful to avoid overstocking. 

Do the opposite for off-peak seasons. Reduce inventory levels to minimize carrying costs on low-demand products, keeping a close eye on availability. 

Balance stock availability with carrying costs

Carrying costs are the costs associated with storing unsold goods, such as storage, handling, and depreciation. They quickly tie up cash flow and erode revenue. 

That said, you need to make sure you have enough stock to meet customer needs.

This is where inventory and order management software is crucial. It gives you real-time insight into inventory levels across channels, automating stock replenishment according to your optimal levels. As a result, you minimize overstocks, understocks, and the subsequent carrying costs, improving your cash flow.

Use forecasting tools to anticipate customer needs

Leverage an advanced stock forecasting tool to deeply understand customer behavior and anticipate needs. 

Forecasting tools use cutting-edge technologies to collect comprehensive data—historical sales data, customer browsing habits, market conditions, and more. Through analysis, these solutions can uncover insights to make accurate predictions. 

This means you can anticipate shifts in customer demand to optimize your inventory, production operations, and marketing strategies accordingly.

For example, a retail clothing store might use AI-powered forecasting to predict the on-trend styles for the next season, and a hot beverage retailer might use them to predict what flavors will be in demand (such as pumpkin spice and cinnamon during fall and winter). 

Base production schedules and workforce on seasonal demand

Inventory isn’t the only thing you’ll need to scale during peak seasons. To meet the increased demand for products, you’ll need to amplify your production and scale your workforce by refining schedules and hiring more employees. 

And when demand goes down, your production levels and workforce should also scale down to reduce labor and manufacturing costs. 

The tricky part is figuring out exactly how many more employees you need. Leverage historical workforce data, such as key performance indicators during different seasons, along with sales, inventory, and finance data. This will provide insight into workforce requirements. 

From there, hire part-time/temporary staff in alignment with needs and adjust accordingly. 

A manufacturing ERP system can help here, too. ERPs provide a unified view of your manufacturing process and data, from planning and inventory to sales, finance and people management. With this consolidated overview, you can easily access data from different areas to understand the seasonal relationship between labor, finance and inventory.

Offer seasonal promotions during off-peak periods

During off-seasons, discounts, promotions and sales can reel in price-sensitive customers. It’s why things such as the January Sales are so effective—customers are always looking for a bargain.

Seasonal promotions can help you maintain a healthy cash flow during off-peak periods while ridding you of surplus stock. The revenue generated during off-peak periods can not only help you get by, but it can be invested in new marketing strategies, technologies and products that will maximize profit in the peak periods. 

Plus, offering discounts to current customers can drive customer loyalty. Loyal customers account for 41% of your revenue, making them critical to your cash flow during slow periods. 

Make sure your seasonal cash flows and inventory management match

Navigating the highs and lows of seasonal demands can be a challenge. But with effective inventory management and forecasting strategies, you can confidently maintain optimal inventory levels, accurately predict and prepare for peak seasons and keep cash flowing during off-seasons. 

From dynamic pricing and demand forecasting to seasonal promotions, there are lots of techniques you can use to maintain a healthy cash flow and meet customer needs year after year. Don’t forget to invest in the right tools and leverage data every step of the way.