BlogCommercial FinanceCommercial Finance Blog

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

By 06.12.20January 27th, 2021No Comments
Person in a warehouse using a laptop to help manage orders

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 switch over 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 affects 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? Long-term Growth 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. Having contingency plans in place can be essential to navigating 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 your 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 materials, work-in-process (WIP), finished goods, and maintenance, repair and operating (MRO) supplies.

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

Finance Partner for Inventory Contingencies

Businesses that are waiting for customers to pay under extended payment timeframes while dealing with demand volatility will find planning ahead is crucial. Late payments, holding excess inventory and short-term purchasing opportunities can 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 for the 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 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 your business’s inventory to create funding solutions.