Inventory Tips to Avoid Cash Flow Headaches When Tariffs Cause Pricing Volatility

By Bibby Financial Services

19 Nov 2018

Tariffs and Inventory - Overstock, Stockpiling, Short vs Long-term Trends

When tariffs are imposed it naturally causes an increase in the costs of doing business. This cost shift causes volatility affecting the market in unexpected ways. For some industries, tariffs cause an immediate situation of rapid growth, as businesses switchover to a new supplier or there is an increased demand over the short term for a certain product. This immediate boom can be followed by subsequent increases and decreases in demand as the market reacts to increased costs with volatility. Market volatility created by rising costs also affect payment periods causing more uncertainties and defaults on payment terms offered to customers. However, business owners can navigate these challenging times by being prepared and managing their inventory with a few tips and tricks. 

What Should You Expect? Growth Long-Term Under Tariffs
Several studies on economic research claim that tariffs hinder growth long-term, leading to either a steady economic contraction over time or a reduction in the economic growth rate from what is optimal. Initial periods of rapid growth are created by the artificial competitive advantage on market prices that tariffs create. However, the demand increases suppliers or businesses often see due to ‘stockpiling’ behaviors before tariffs go into effect are short-term by nature. 

As these demand increases and price advantages diminish over time,  the tariffs create swells to overall market and transaction costs. Further, the increased costs will slowly reduce average demand over time, while pricing volatility will make demand forecasting uncertain for impacted business owners. To protect their businesses, entrepreneurs should consider taking advantage of key purchasing opportunities and having contingency plans in place can be key to navigating this market volatility.

Tips & Tricks - Managing Inventory Through Volatility
To manage inventory in times of volatility conduct an inventory appraisal to provide a fundamental understanding of what your inventory risk level will be in times of uncertainty. Inventory appraisal provides the Net Liquidation Value (NLV) for each of the company’s categories or physical assets that can be liquidated by a seller or offered by the lender. Understanding NLV is key to making informed decisions about when to release inventory or when to hold it. Clarity into the assumed risks can also help with managing your long-term relationship with your lenders and suppliers. Without an appraisal, you cannot accurately predict if market changes can cause inventory shortages or leave you with inventory you can’t sell.

Inventory types are generally grouped into four categories: raw material, work-in-process (WIP), finished goods, and Maintenance, repair, and operating supplies (MRO) goods.

Depending on your business's inventory, the categories you choose to monitor can be flexible and should be tailored to the specific needs of the business. It is easy to group the results of the detailed inventory analysis into specific inventory categories to meet your monitoring needs. 

Type:  Finished Goods, Raw Materials, MRO, WIP, etc.
Aging: Slow moving, Discontinued, Obsolete, Over/Under 1 year
Location: Country, 3PL, Consignment, In Transit
Metrics: Turns, Weeks of Supply, Buckets, Unit Cost
Class: Eligible/Ineligible: Seasonal, Licensed, Branded, Packaging
FG: Near FG (WIP), Special Use 
RM: Components, repair parts, Long lead time/Economic Ordering Quantity (EOQ) parts

A Finance Partner for Inventory Contingencies
Businesses that are waiting for customers to pay under extended payment timeframes and also dealing with demand volatility will find planning ahead is key. Late payments, holding excess inventory and short-term purchasing opportunities can all diminish cash flow and leave your business in a difficult position. 

Industries vary, so finding the perfect turnover target for inventory will be different depending on your business. Avoid holding excess inventory for projected demand beyond what would be forecasted under normal conditions. Projecting or anticipating ‘boom-level’ demand long-term can be a faulty formula for growth if after the tariffs are in-place the number of orders drops over time. 

Having a flexible inventory finance and invoice factoring partner can help you ensure that, late payments, demand volatility or last-minute purchasing opportunities do not disrupt your cash flow. Factoring of accounts receivables and asset-based lending are two financial services products that can leverage a business’ inventory to create funding solutions.  
 

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