Stock and supplier terms: freeing the cash sitting on your shelves

Walk through any warehouse, workshop or shop and you’re looking at cash that’s been converted into boxes. Some of it will turn back into cash next week. Some of it won’t for months. Some of it never will. Managing stock well is one of the most direct ways to improve cash flow, and it’s often overlooked because the money doesn’t look like money.

How much cash is tied up in your stock?

The key measure is stock days: how many days of sales your stock would cover.

Stock days = stock on hand at cost ÷ annual cost of sales × 365

Illustrative example. An Auckland homewares retailer holds $180,000 of stock at cost. Its annual cost of sales is $820,000. That’s about 80 days of stock. If it could run comfortably on 55 days, it would hold about $124,000 instead, freeing around $56,000 of cash.

Stock days vary widely by industry. A café might hold a few days; a hardware store, engineering supplier or furniture retailer much more. The useful comparison is with your own history and with what the business genuinely needs to serve customers.

What is the cash conversion cycle?

Stock is one of three timing gaps that together decide how long your cash is tied up:

Measure	Formula	What it tells you
Stock days	Stock ÷ cost of sales × 365	How long cash sits on the shelf
Debtor days	Debtors ÷ sales × 365	How long customers take to pay
Supplier days	Creditors ÷ purchases × 365	How long you take to pay suppliers
Cash conversion cycle	Stock days + debtor days − supplier days	How long each dollar is tied up

A retailer with 80 stock days, almost no debtors and 30 supplier days has a 50-day cycle. A wholesaler with 70 stock days, 45 debtor days and 30 supplier days has an 85-day cycle, and needs far more working capital for every dollar of sales.

How do you reduce stock without losing sales?

Find the slow lines. In most businesses a small share of product lines carries a large share of stock value, and some of it hasn’t moved in months. Run a stock ageing report and list anything older than your normal turnover period.

Clear dead stock deliberately. Discounting old stock feels painful, but the cash is often worth more than the margin. Use it to fund lines that sell. Our page on margin vs markup helps you work out how deep a clearance price can go.

Set reorder points. For your core lines, decide the minimum level that triggers a reorder, based on how fast it sells and how long suppliers take to deliver. That prevents both stockouts and panic over-ordering.

Order little and often where possible. Smaller, more frequent orders keep stock lean, though freight costs may rise. Weigh the two.

Watch seasonal builds. Retailers stocking up for Christmas or tradies stocking for spring use a lot of cash before sales arrive. Plan these builds in your forecast and fund them deliberately.

How do supplier terms help?

Every extra day you take to pay a supplier, within agreed terms, is a day the cash stays in your account. If you can sell stock before you’ve paid for it, suppliers are effectively financing your inventory.

Approaches that work in New Zealand:

• Ask for 20th-of-the-month terms if you’re on 7 or 14 days. It’s a familiar convention, and suppliers who use it with their own customers often accept it.
• Consolidate purchases with fewer suppliers to strengthen your hand.
• Offer something in return: a longer commitment, forecasts of your orders or prompt payment within the agreed terms.
• Use consignment or sale-or-return for new or uncertain lines, where suppliers allow it.

What doesn’t work is simply paying late. It damages relationships, can cost you supply when you most need it and may eventually affect your credit standing.

How do you count stock reliably?

The measures above are only as good as your stock figure. A full stocktake at least once a year (for most businesses, around balance date) is the baseline, because your accountant needs closing stock for the annual accounts. Between stocktakes, a perpetual inventory system in your point-of-sale or accounting software gives running figures, and regular cycle counts of your fastest-moving or most valuable lines keep it honest. A gap between what the system says and what’s on the shelf is worth investigating: it can point to shrinkage, receiving errors or pricing problems. It also affects your cash flow versus profit picture, because overstated stock overstates profit.

What about GST on stock?

GST on stock purchases from registered suppliers is claimable, which helps. But you pay the supplier, including GST, before the claim reduces your GST bill. On two-monthly or six-monthly GST filing, that can mean waiting a while for the benefit. A big stock build just before a GST period ends gives a quicker offset than one at the start.

When the stock build is the plan

Sometimes holding more stock is the right decision: a new product range, a bigger customer, a seasonal peak or a bulk-buy opportunity at a genuinely good price. In those cases, the question is how to fund it without draining money needed for wages and tax. A working capital facility sized to the stock build can work well; you can see what’s possible in about a minute.

Our feature on why growth eats cash shows how to estimate the working capital each step of growth will need.

Turning stock into cash and cash into growth

Leaner stock and better supplier terms free money you already have. When the business needs more than that, for a planned build or a growth step, talk to us. We look at unsecured options for trading businesses and lending secured on residential or commercial property. There’s no credit check to enquire, your details stay with one team rather than circulating among lenders, and a real person reads your enquiry. The more accurate your answers, the better our first call. Start the enquiry.