Don’t Let Excess Inventory Put You Out of Business After the Holidays
What happens if you don't meet your Q4 goals and you end up with way too much inventory on hand? Read our CFO partner's tips below on how to manage and come out ahead of excess holiday inventory.
So, you’ve stocked up on enough inventory to crush your Q4 sales goals. This is great, right?
What if you miss your sales goals by a mile, leaving all your cash tied up in excess inventory headed into Q1?
Will your brand survive?
Suddenly your aspirations of reaching record-high Q4 revenue and profits give way to nightmares of bankruptcy that keep you up all hours of the night.
Worry no more!
I’ve got you.
I’ve been through dozens of holiday seasons in the DTC consumer space and have ended many of them with way too much inventory.
Here’s the good news for you today:
I’m going to walk you through three simple steps you can take to survive ending the holiday season with too much inventory.
I’ve used these exact tactics in real life many times over, so I know they work.
By arming you with this knowledge, you’ll be able to sleep easy at night knowing that you’re taking proactive action to keep your brand moving forward towards scaling success, even amidst carrying too much inventory.
Tip #1 – Ask Your Key Suppliers for Help
As soon as you realize that you’re likely to underperform your sales forecast, get on a call with your key suppliers and inform them of your situation. There are several ways that you can partner with your manufacturers to reduce the cash constraint caused by excess inventory positions.
Here are a few tactics I’ve used in the past with my key suppliers:
- Ask your supplier for one-time extended payment terms: if you haven’t paid your factory in full for the inventory you have on hand, work out a one-time payment plan on the remaining balance. Do you owe them a 70% balance on your last PO? Ask them to pay it in three equal installments, with specific payment dates you can commit to. I’ve never had a factory tell me no when I ask for this. They’d rather get paid late than not get paid at all. Obviously, this isn’t a card you can pull frequently. But if it’s something that happens infrequently and you have a solid relationship with your vendor, it’s usually something you can successfully negotiate.
- Ask your supplier to cancel or delay open POs that you placed for Q1 inventory: I know this is something that can upset suppliers, especially if they’ve already outlaid the cash for the materials needed to produce your POs. If that is the case and your vendor insists that they can’t cancel your PO, ask if you can make a partial payment that covers your supplier's cash investment in the order. This makes the factory whole on what they’ve invested so far while they wait to produce your PO at a later date.
Tip #2 – Draw Down on Your Line of Credit
If you have a line of credit, oftentimes an excess inventory position is a great time to draw down on the line to get through a tight period of constrained cash.
If you don’t already have a line of credit in place, I highly recommend the Ampla Growth Line of Credit. You have the flexibility to draw down on the line at any time (up to your max credit limit) and doing so allows you to finance your excess inventory position and pay back the line as you right-size your inventory levels in Q1 and Q2.
One word of caution here -- if used incorrectly, debt can be risky. But, the responsible use of debt is a key strategy that most successful scaling brands leverage.
How does one use debt responsibly? It starts with consulting your CFO, who should be forecasting future expected cash flows using a three-statement financial model. Using this tool, your CFO can advise on the responsible amount of debt your brand can take on to get through the tight cash situation.
If you don’t currently have a CFO, consider contacting us at Free to Grow CFO. We’re experts at managing cash flow through periods of excess inventory and we can help you navigate the situation with confidence and peace of mind.
Tip #3 – Freeze all Future Purchases Indefinitely
Now that you’ve contacted your key suppliers and drawn down on your line of credit, the next step is to freeze all future inventory purchases indefinitely while you sell through your excess inventory positions in Q1 and Q2.
Keep your suppliers closely informed on when they might receive the next inventory POs so they can anticipate the changes in expected demand.
Once you’ve sold down your inventory levels to an acceptable level and paid down the line of credit you used to finance your excess holiday inventory, you can calculate and send out the next PO to your inventory suppliers.
In summary, just because you purchased too much inventory for the holidays doesn’t mean you’re destined for bankruptcy.
The most sophisticated scaling DTC brands make this mistake more often than you think. What sets them apart is knowing how to leverage their CFO to help navigate through a season of constrained cash.
Remember, if you get into a situation where you’re likely to end the holiday season with excess inventory:
- Ask your key suppliers for help.
- Draw down on your line of credit.
- Freeze all future purchases indefinitely until you right-size your inventory levels.
If you follow the advice in this article, you’ll likely make it through this challenging situation and come out strong, wiser, and ready to continue scaling.
And don’t forget -- if you don’t currently have a CFO, consider contacting us at Free to Grow CFO. We’re experts at managing cash flow through periods of excess inventory and we can help you navigate the situation with confidence and peace of mind.
Until next time, scale on!
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