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In today's dynamic business landscape, strategic expansion plays a vital role in ensuring the long-term success and survival of small businesses. However, achieving growth is no easy feat, and expanding a business doesn’t come without financial and operational challenges.

But don’t worry, achieving growth is well within your reach. With the right strategy and approach, you can level up your business and fund its expansion. One of the most common ways to finance your expansion efforts is through a 

. Most, if not all, small businesses get to that point where a small business loan becomes a necessity.

In this article, we’ll explore how small businesses can leverage loans to fuel their growth and provide insights you’d need to know before embarking on the loan application process.

What if sales are not declining, customers aren’t unhappy, but you’re not necessarily expanding or growing as a business? Should you be worried? Unfortunately, the answer may be yes.

It’s not enough to have things running smoothly without any real growth in your 

. To survive and thrive, a business needs to evolve to meet the changing needs of its customers and the industry landscape. When a business stops growing, it often starts dying, because customers eventually move on and the market changes. If you don’t change with it, you get left behind. Expanding your business opens doors to new possibilities, allowing you to capitalize on fresh opportunities, boost your revenue, and 

 can be an exciting prospect, filled with opportunities for growth and increased profitability. However, expansion shouldn’t be pursued for it’s own sake, but as a strategic move that aligns with your business's objectives and market conditions. By carefully assessing the need for expansion, you can make informed decisions and lay a strong foundation for success.

Approaching business expansion with a balance of enthusiasm and prudence is key. Before diving into the 

, take a moment to explore a few questions:

Answering these questions will help you evaluate the viability and potential risks associated with expanding your operations and ensure your business is well-prepared to seize new opportunities, increase revenue, and enhance profitability.

Factors to consider before expanding your small business

Every strategic business move requires planning and careful consideration of the factors involved. Understanding these factors will not only ensure the success of your expansion but also safeguard your business's financial stability and long-term viability. Here are four key factors you should consider before taking the leap into expansion.

Before applying for a loan, it's important to conduct a thorough market analysis to find viable growth opportunities that align with your business goals. This includes assessing market demand, competition, and feasibility.

For example, when considering opening a new location, evaluate whether the market can support another branch. Is there a growing customer base or potential for new customers in your target market? Would a new location cannibalize customers from your current location, or would it tap a completely new customer base? Expansion should be driven by a clear demand for your offerings to ensure a sustainable and profitable venture.

 is an essential step to understanding the demand for your product or service in new markets and evaluating the competition. Consider factors such as target demographics, purchasing behavior, and any unique challenges or trends within the industry. This analysis will enable you to assess the potential demand for your offering in new markets and determine if the growth opportunity is worth pursuing.

Approaching market analysis with an informed and optimistic mindset allows you to identify untapped possibilities, make strategic decisions that contribute to your business's long-term success, and position your small business for sustainable growth.

 before pursuing expansion through borrowing. Taking on additional debt without a clear understanding of your ability to repay can have detrimental consequences. 

, credit score, and debt-to-income ratio. Understanding these financial metrics will give you insight into your business's borrowing capacity and its ability to handle additional debt obligations.

Evaluate your current expenses and revenue to gain a comprehensive view of your financial position. This analysis will help you determine the amount of funding required for expansion and whether your business can comfortably manage the loan payments. Ensure that your business has a strong financial foundation to support the costs and risks associated with expansion.

If your business is currently facing financial challenges, it may be prudent to focus on improving its financial health before pursuing expansion. Consider implementing strategies to enhance cash flow, reduce debt, and optimize profitability. By addressing these foundational aspects, you can position your business for long-term success and create a solid financial foundation for future growth.

Assess your operational capacity to handle expansion. Do you have the necessary resources, infrastructure, and systems in place to manage increased production, sales, or service delivery? Identify any gaps or limitations that may hinder your ability to scale effectively.

Evaluate your workforce and their skill sets. Determine if you have the necessary talent and expertise to handle increased demands during the expansion. If not, consider options such as hiring additional staff or providing training to bridge any skill gaps.

 and vendor relationships. Ensure you have reliable suppliers who can meet increased demand and negotiate favorable terms to support your expansion plans. By conducting a comprehensive evaluation of your operational capacity and resources, you can identify areas that require attention and make strategic decisions to ensure a successful expansion.

Do you have a defined plan that goes beyond getting a loan and pumping it into the business? A sound growth strategy is essential for the success of your business expansion. Draw up and establish specific and measurable targets that align with your long-term vision. This will serve as a guide, identifying where and how to spend your funds.

Identify your target market and refine your marketing strategy. Understand your customers' needs, preferences, and behaviors to effectively position your business and attract new customers.

Develop a detailed implementation plan. Break down the expansion process into actionable steps, assigning responsibilities and setting timelines. This will help ensure a smooth and organized transition.

Monitor and track key performance indicators (KPIs) to measure the success of your expansion efforts. By developing a robust growth strategy, you set the stage for a well-planned and purposeful expansion. It allows you to approach the journey with confidence, knowledge, and enthusiasm, ensuring that your small business flourishes in the face of new opportunities. Not only will this give 

a clear path to follow, but it will also give lenders confidence that you have a solid plan in place to use the funds effectively.

Preparing your business for a successful loan application

Applying for a loan can indeed seem daunting, but proper preparation can significantly increase your chances of success. Here are additional tips to help you prepare your business for a loan application:

1. Developing a comprehensive and convincing business plan

A solid and well-crafted business plan serves as the foundation for any successful loan application. Your business plan should go beyond outlining your growth strategy; it should also provide a clear and concise snapshot of your business's current state. This includes valuable information about your target market, competitive analysis, and financial projections.

When creating your business plan, it's important to remember that lenders want to see a well-thought-out plan that demonstrates how you will use the loan funds to grow your business. Clearly articulate how the loan will contribute to your expansion plans, whether to fund new equipment, hire additional staff, or penetrate new markets.

Your credit score is one of the most critical factors lenders consider when reviewing loan applications. If your business's credit score needs improvement, take proactive steps to boost it before applying for a loan, including doing the following:

Improving your creditworthiness not only improves your chances of loan approval but also helps secure more favorable loan terms, such as lower interest rates and higher borrowing limits.

Lenders will require a range of financial documents to assess the financial health and viability of your business. Gather and organize these documents in advance to streamline the loan application process. Typical financial documents include:

To ensure that your financial statements are organized and accurate, it's a good idea to work with a professional accountant or bookkeeper. They can help you prepare and present your financial information in a  clear, up-to-date way that supports your loan application.

4. Determining the optimal loan amount needed

Before submitting a loan application, you need to know exactly how much capital you need to fund your expansion plans. This involves accounting for all expenses associated with your growth strategy, including equipment costs, marketing expenses, operational expenditures, and any other relevant financial commitments.

By calculating the loan amount needed in advance, you can avoid the risk of borrowing too little or too much and ensure that you have the necessary funds to achieve your business goals. Striking the right balance ensures that you have the necessary funds to effectively execute your business goals while maintaining financial stability.

increase your chances of success when applying for a loan

. Remember, lenders are more likely to respond favorably to loan applications that come from well-prepared and financially stable businesses. By presenting a clear and compelling case in all the above mentioned, you increase your chances of securing the funding necessary to propel your business forward.

Managing loan repayments and monitoring business performance

Congratulations on securing the loan! However, your long-term success extends beyond just obtaining the loan. Effectively managing loan repayments and closely monitoring your business's performance is what truly creates a solid foundation for sustainable growth.

Monitor your cash inflows and outflows diligently, ensuring that you have sufficient funds available to meet your loan obligations. Implement sound cash flow forecasting techniques to anticipate potential shortfalls and take proactive measures to mitigate them. Make sure you plan for the cash flow impact of your expansion by weighing the cash outflow of loan payments against the extra cash inflow of your expansion. If you borrow to expand in a way that won’t boost your cash flow, you could be putting yourself in a bind, so be aware.

2. Implementing budgeting and expense control

Develop a detailed budget encompassing all aspects of your business operations, including loan repayment as a core expense. Your budget should outline anticipated revenues, fixed and variable costs, and other financial obligations.

Regularly reviewing and analyzing your budget to identify areas where cost-saving measures can be implemented will help you control your expenses.

Regularly analyze your business's financial performance to gain insights and track its overall health. Monitor key financial indicators such as revenue growth, profit margins, and debt-to-income ratio. By regularly assessing your financial data, you can identify areas for improvement, make informed decisions, and take necessary actions to ensure financial stability.

4. Monitoring key performance indicators (KPIs)

Define and monitor relevant KPIs that align with your business goals and loan repayment obligations. These KPIs could include metrics like customer retention rates, conversion rates, or inventory turnover.

By tracking KPIs, you gain valuable insights into the effectiveness of your business operations, identify areas of optimization, and make data-driven decisions to maximize your performance and meet your loan repayment obligations.

It's crucial to develop contingency plans to mitigate potential risks and challenges that could impact your ability to make loan repayments. Consider scenarios such as economic downturns, regulatory changes, or unexpected market fluctuations.

By proactively planning for contingencies, you can minimize disruptions, adapt to changing circumstances, and maintain consistent loan repayments, ensuring the financial stability of your business.

6. Maintaining open communication with the lender

Foster a transparent and open line of communication with your lender throughout the loan repayment period.

If you encounter financial difficulties or anticipate challenges in meeting repayments, let your lender know right away. They may be able to provide guidance, offer alternative repayment options, or work with you to find a suitable solution.

Keeping your lender informed shows your commitment to fulfilling your obligations and helps build a strong working relationship based on trust and mutual understanding.

Expanding your small business can be a challenging but rewarding experience. By following the steps outlined in this article, you increase your chances of obtaining a loan and ensure it’s used effectively to achieve your expansion goals. Plan appropriately and choose the right loan that meets your business’s needs. 

Achieving growth is no easy feat, and expanding a business doesn’t come without financial and operational challenges.

See how you can use small business loans to grow your company, how to decide if you're ready to expand, and how to get approved for a loan and manage repayment.

How small business loans can help you grow your business

How to utilize business loans for expansion

How to Utilize Business Loans for Expansion

If you’re a small business owner, you probably already know that securing funding can be a major challenge. Without funding, you lose out on sales and opportunities for growth. If this resonates with you, it's time to consider small business loans.

Small business loans play a crucial role in providing entrepreneurs with the necessary financing to start or expand their businesses in ways that may otherwise be out of reach. Whether you're aiming to fuel 

, explore new ventures, or conquer immediate challenges, small business loans can be a game-changing solution.

In this article, we delve into the world of small business loans, covering everything you need to know:

Let’s dive in! (You won't fall, we’ll be holding your hands).

Before going into the pros and cons of small business loans, we’ll begin by defining them. In its most basic form, a small business loan is a financial product designed to help small and medium-sized enterprises (SMEs) access capital to fund their businesses.

Small business loans serve as a lifeline for entrepreneurs, providing them with the capital needed to fund new projects, weather financial storms, acquire equipment, hire staff, purchase inventory, or expand operations.

They come in various forms, ranging from traditional loans to specialized financing products like 

, and invoice financing. The primary advantage of these loans is that they provide companies with access to resources they would not otherwise have. By offering capital to SMEs, small business loans enable them to seize new opportunities, create jobs, and contribute to local economies.

They can be obtained from various sources, including traditional banks, credit unions, online lenders, and 

. It's important to note, however, that each type of lender may have different eligibility criteria, loan terms, interest rates, and associated fees.

Small business loans come in various forms, each with its own advantages and considerations. Here are some of the most common types:

These are traditional bank loans with a fixed repayment term, interest rate, and monthly payment. They are typically used for large projects or investments, such as equipment purchases or real estate acquisitions. Term loans can come from traditional banks, credit unions, or online lenders, and they often require collateral or a personal guarantee.

A business line of credit is a flexible loan option for small businesses. It allows you to quickly access a set amount of money whenever needed. Basically, they provide businesses with ongoing access to capital. They are suitable for managing short-term cash flow needs or unexpected expenses. Lines of credit can come from traditional banks, credit unions, or online lenders, and they often require collateral or a personal guarantee. Unlike a term loan, you only pay interest on the money you use. After a certain period, usually five years, you can no longer withdraw funds and must start repaying the loan.

 and are available through traditional lenders or online lenders. Unlike traditional loans, SBA loans have lower eligibility requirements and longer repayment terms of up to 25 years. SBA loans can be used for a variety of purposes, including working capital, equipment purchases, and real estate acquisition. There are different types of SBA loans, each offering unique benefits and maximum loan limits. However, SBA loans generally range between $30,000 and $5 million. 

 MCA is a type of business financing in which a lender provides a lump sum of cash to a company up front. Unlike traditional loans, repayment is linked to the business's future credit card or debit card sales.

With each sale made and customer payment received through cards, a portion of that sale is directed to the lender to repay the advance. This repayment arrangement continues until the total advance, along with any agreed-upon fees, is fully paid off. It's important to note that the repayment timeline can vary based on the business's sales volume.

 is specifically designed to assist businesses in purchasing various types of equipment, including machinery, electronics, fixtures, and technology.

For small businesses, having the right equipment is essential for day-to-day operations. Without the necessary tools, companies may face decreased productivity, increased costs, and an inability to compete.

Beyond operational efficiency, it helps small businesses expand services, reach new customers, and increase revenue. Financing equipment preserves cash flow, allows access to new technology, and maintains competitiveness. Equipment financing offers tax benefits by deducting interest paid on loans,  reducing the overall tax burden and freeing up cash flow for your business.

The loan amount for equipment financing is typically based on the value of the item and the down payment provided by the borrower. They often come with more flexible repayment terms than traditional loans. SMEs can obtain equipment financing from traditional banks, credit unions, or online lenders, and the equipment itself may serve as collateral.

Assessing your needs–do you need a business loan?

Before applying for a small business loan, it's important to evaluate your company’s needs and determine what type of loan would be the best fit. This seems obvious enough, except it isn’t.

As a general rule, remember two important points before taking a loan for your business: first, only take a loan when it helps you seize opportunities to increase revenue and grow your business. Second, avoid relying on a loan to keep a failing business afloat. Here are some factors to consider when assessing your funding needs:

The first step in assessing your business’s needs is to determine how much money you require. Consider whether you are seeking funding for a new project, expanding your product line, or covering current expenses.

It's important to assess both your short-term and long-term financial goals when determining the loan amount. Striking the right balance is important—borrowing too little may leave you short on funds while borrowing too much can lead to unnecessary debt burdens.

One way to determine the loan amount is to create a detailed budget that outlines all of your expenses and revenue projections. This will give you a clear picture of your financial needs and help you make an informed decision about the loan amount.

Knowing what you want to accomplish with your loan is just as important as knowing how much cash you require. Are you looking to expand your business, cover expenses during a slow season, or finance a specific project?

For instance, if you're looking to expand your business, you may need a more significant loan amount and a longer repayment term. On the other hand, if you're looking to cover expenses during a slow season, a short-term loan may be more appropriate.

It's also important to consider the potential return on investment (ROI) of the loan. Will the loan help you generate more revenue or increase your profitability? If so, it may be worth borrowing the money.

Ultimately, identifying the purpose of the loan will help you choose the right loan product and ensure that you're using the funds wisely.

What you need to apply for a business loan; preparing essential documents

Applying for a business loan can be an exciting step towards achieving your goals. Before applying for a small business loan, it's essential to prepare yourself and your business by gathering all the necessary documents to support your application. This step can help you overcome common hurdles and improve your chances of getting financing. Here's a simple guide to help you prepare:

Make sure your financial statements are accurate, up-to-date, and prepared by a certified public accountant (CPA). If you don't have a CPA, consider hiring one to prepare your financial statements. A CPA can also provide valuable advice on improving your financial performance and increasing your chances of getting approved for a loan.

If you have any outstanding tax liabilities, make sure to address them before applying for a loan. Lenders will be hesitant to approve your loan if you have any unresolved tax issues. Make sure to have your business tax returns for the past few years ready. This helps lenders assess your financial stability and verify your income.

Include a comprehensive market analysis in your plan, highlighting your target customers' needs and how your offerings meet them. Add a detailed financial plan projecting revenue, expenses, and profits for the next few years, along with a break-even analysis. A well-crafted plan showcases your vision, strategy, and growth potential. It helps lenders grasp your business and shows them how you'll maximize the loan. Your accountant can help you prepare these as well.

Being prepared can help streamline the loan application process and increase your chances of getting approved for a loan. Make sure to evaluate your options carefully, weigh the benefits and drawbacks of each type of loan, and choose the one that best aligns with your needs and goals.

Certainly, all this is a lot to take in. However, remember, we're here to guide you through the process and answer any questions you may have.

Lenders assess your loan application based on various factors. Familiarizing yourself with these factors can help you choose the appropriate loan and lender. Here are some aspects to consider:

It's no surprise that lenders rely on your past credit performance to assess your ability to handle new credit. They primarily consider two key factors: your personal credit score and your business credit score. These scores provide valuable insights into your creditworthiness and help lenders gauge the level of risk involved in extending credit to you.

So how do you get that high credit score lenders want? Nobody knows the exact algorithms that determine your 

 (except FICO, of course), but we know the factors: your payment history, how much you owe, how much new credit you have, how long you’ve had credit, your debt-to-limit ratio, and the diversity of your credit history.

Improve those factors to boost your score–make timely payments, reduce the debt-to-income ratio, and limit credit inquiries. Regularly monitor your score and correct any errors.

To improve your business credit, start by making sure your business has a name, legal entity, and an 

Also, ensure you're paying bills on time, maintaining a low debt-to-income ratio, and building a positive credit history. You should also open a business-specific bank account and get a D-U-N-S number. As you get credit and loans, pay them off on time. Then watch your credit score climb.

Maintaining a good credit standing shows your financial responsibility and enhances the likelihood of securing the necessary financing for your business. If your credit history needs improvement, don't worry—we can provide guidance on how to enhance your credit profile.

When applying for a business loan, know that lenders often prefer working with businesses that have a solid track record of operating for a certain period, typically around six months to a year. This showcases your business's stability and proven ability to effectively manage day-to-day operations.

As a general rule, the longer you have been operating, the greater the opportunities for obtaining financing. While most lenders want historical performance to evaluate, there are specialized loan options tailored for startups that are worth exploring.

Lenders will carefully evaluate your business's revenue and 

 to assess its financial health. While specific requirements may vary, having a consistent revenue stream and demonstrating profitability can significantly increase your chances of qualifying for a loan. Showing that your business generates a steady income highlights its potential for growth and success.

, they want to understand more than just your business's revenue. Positive cash flow indicates that your business generates sufficient income to cover its expenses and loan repayments. Demonstrating a healthy cash flow reassures lenders of your ability to manage loan obligations, thus enhancing your eligibility.

The debt-to-income ratio, also known as your debt load, is a key factor that lenders consider. This ratio compares your total debts to your income. A lower ratio signifies a healthier financial position and can improve your eligibility for a business loan. Maintaining manageable debt relative to your income showcases your responsible handling of financial obligations.

In certain cases, lenders may take into account the industry in which your business operates. Some industries may be perceived as having higher risks due to market volatility or other factors. Additionally, offering collateral, such as property or equipment, can provide added security for the loan and potentially enhance your eligibility. 

Small businesses are the backbone of the economy, and they play a vital role in job creation and economic growth. However, starting or expanding a small business can be a daunting task, especially when it comes to financing. That's where small business loans come in. Small business loans offer a variety of benefits to entrepreneurs, including:

Access to capital is one of the primary benefits of small business loans. As any entrepreneur knows, starting or expanding a business requires a significant up-front investment. Small business loans provide companies with the capital they need to get off the ground, purchase inventory, or invest in new technology. This is particularly valuable for businesses that are just starting out or looking to grow.

Compared to traditional loans, small business loans often come with more flexible terms. These may include longer repayment periods and reduced monthly payments. Such flexibility helps businesses manage their cash flow and avoid overextension. Additionally, some lenders will offer small business loans with no prepayment penalty, allowing companies to pay off their debt early and save on interest costs.

Find out how small business loans can help you grow, the different types of loans that could be right for you, and how to qualify.

Find out how small business loans can help you grow, the different types of loans that could be right for you, and how to qualify for a small business loan. 

All you need you need to know about small business loans

A comprehensive guide to small business loans

A Comprehensive Guide to Small Business Loans

While profit can be a great way to measure the success of your business, 

 is essential to keeping your business running. And if you’re a product-based business, your inventory is one of the biggest factors for managing cash flow. It’s easy to tie up a lot of cash in inventory, and optimizing your inventory management process lets you keep enough free cash available for other operational expenses.

Having the right strategy to manage inventory will push your cash flow in a positive direction. It’ll help you keep the right products in stock, avoid excess inventory, predict cash flow, and understand the best time to order new inventory.

So, how do inventory and cash flow work together? Keep reading to find out.

Why cash flow is so important for businesses

Cash flow is the money that flows in and out of your business, reflected on your cash flow statement. Cash flows in from product sales, investment income, and asset sales—while it flows out through inventory purchases, interest payments, rent, and salaries.

Good cash flow means you can pay your bills and keep investing in growth. When you have money coming in and good cash flow projections, you can invest in product research, test product categories, research new designs, and build marketing campaigns.

Poor cash flow will impact your ability to operate and grow. Even if you have good 

, if you can’t reliably collect money from customers and other sources, you don’t have a predictable source of cash to cover expenses or re-invest. One late invoice payment means you may struggle to pay expenses and be unable to buy the inventory to sell to customers.

Inventory is one of your greatest assets as a product business. You need enough stock to fulfill orders, and if you run out, you run the risk of missing sales and losing customers—or at least losing out on customer satisfaction.

The problem comes when you don’t accurately predict how much inventory you need. Buying too little inventory saves money but increases the risk of out-of-stocks. If you purchase too much inventory, your company may tie up cash in products that sit on the shelf and may even need to be discounted to sell before they expire or go out of style.

Inventory optimization will help you maximize your company’s cash flow. You can use current 

and historical data to determine how much you can expect to sell monthly. This information will give you insight into the optimal inventory to buy to avoid running out or keeping too much in stock, giving you an ideal inventory level.

Inventory management tips for improving cash flow

So, now you know why inventory management matters for cash flow. What are a few ways to optimize inventory for better cash flow? Let’s take a look. 

One of the first steps to smart inventory management is understanding how much product you’re currently selling. Use your inventory management software to create a report covering how much of each product SKU you’ve sold.

You can use different timeframes to gather further insights—daily and monthly reports can help you see how effective your current advertising tactics are. Yearly reports will help you see trends over time and historical order volume during different points in the year.

Your goal is to determine how much inventory you sell each month. This number will help you determine how much inventory you need to order from suppliers and how frequently you need to order.

Track this data regularly and keep an eye on the reports to see trends and make smart decisions based on those changes. This will keep you from overstocking and understocking items that have changed in popularity.

As time passes, you’ll probably see a few of your products do better than the rest. These best sellers will generate the bulk of your company’s revenue. These are the products you’ll need to keep the most of in stock. They’re not only the SKUs you’ll sell most from day to day and the biggest risk for out-of-stocks, they’re also the least likely to cause overstocking problems, as you can sell through any excess quickly. If the 

 holds true (and it usually does), you’ll see 80% of your sales from about 20% of your products.

But that doesn’t stop some companies from stocking many products that underperform. Instead of varying their inventory stock levels for products that don’t sell well, companies still purchase too much, hoping an unpopular product will have future demand and sell more. Companies also consider bulk discounts and believe that saving money on inventory means their business is better off overall. But this isn’t always the case. 

While stocking up in bulk may give you a wider 

, it can cause more problems than it’s worth. More inventory can result in dead stock and excess products, which tie up your cash. You can’t pay the bills with extra widgets, so you often end up discounting them to bring in much-needed cash. Those products that don’t sell well will sit in your warehouse, wasting space, which also costs you money because you’re paying for more warehouse space than your business actually needs. 

Instead, focus on keeping inventory levels up for your best products and reduce the space used for storing inventory items that don’t sell well. Doing this will free up cash flow to experiment with other products or invest in other profitable business activities to fuel growth. (If you sell a ton of shoes but only a few pairs of socks, don’t tie up your cash by buying too many socks. That way, when black socks go out of style and red socks are the new trend (or your supplier gives you a great deal on shoes), you’ll have the cash to order what you need and won’t be stuck with inventory you can’t move.  When Thing 2 becomes the newest trend, you don’t want to be stuck with 1000 units of Thing 1 and no cash to stock up on Thing 2.)

How to calculate inventory turnover ratio 

While there are many granular ways to look at inventory, SKU-by-SKU, one great way to get an overall look at your inventory management is to calculate your inventory turnover ratio. Essentially, this ratio tells you how often you turn over your total inventory, on average, during a certain period. For example, if you measure the inventory turnover ratio for the full year, the ratio will show how many times you’ll sell through the entire stock in a year. A low number may indicate slow sales, but often indicates excessive inventory (i.e., stocking enough to last you months when you can easily restock more often). A high ratio, then, can indicate strong sales or possibly too little inventory on hand, if quick turnover leads to out-of-stocks. 

To calculate the inventory ratio, divide your COGS by your average inventory value.

Inventory Turnover = COGS / Average Inventory Value

This formula makes use of COGS for comparison, because inventory is recorded at cost in your accounting system. These are the costs directly attributed to manufacturing or acquiring the goods. Average inventory is calculated by simply adding your beginning and ending inventory for the period and dividing by two.

When optimizing inventory management, your ultimate goal is to minimize the amount of cash you have tied up in inventory. You want your inventory to sell quickly, giving you the cash required to buy the next batch of inventory for future customers.

This means reducing your order size as much as possible. You only want enough stock to satisfy your current customer demands without running out of stock before your next order.

Remember that this process can take time to get up and running, including dialing in:

Don’t be afraid to liquidate poor-performing products

As a business owner, you won’t always get it right when it comes to ordering or predicting trends. A new product may not sell as well as you expected, but that doesn’t mean the unsold inventory should keep haunting you for months to come. Liquidating old products will help you free up inventory space and generate cash flow for better-performing inventory. 

Your relationship with your supplier may be one of the most essential factors in helping you optimize your inventory management. When you start working with a supplier, there may be little trust. A supplier doesn’t know if you’re a good customer yet, so you may not get the best terms.

But as time passes and trust builds, you can start working to change those terms. One example of this is supplier lead times. Receiving your ordered products quicker will allow you to stock fewer products and have more confidence in maintaining a just-in-time inventory control system.

Net terms are another thing to negotiate with trusted vendors. Again, you’ll get standard terms to begin with, but you can ask to improve them as you build trust with the vendor. For instance, if you’re purchasing inventory on net 30 terms, and your supplier lets you increase to net 45, those additional 15 days can make a huge difference. 

Better terms are a big plus if you have a fast-selling product. You can quickly sell your inventory and pay some or all of your inventory and shipping costs without sacrificing cash flow. As your cash flow improves, you may also be able to get discounted terms by paying 

For instance, 2% 10 net 30 terms would give you 30 days to pay or a 2% discount if paid within 10. This is one way better inventory management and improved cash flow can also grow your profit margins. 

Many of the tips above have focused on avoiding excessive inventory. While tying up your cash in too much inventory is a huge problem, many businesses also struggle to have enough inventory to meet demand. Inventory financing can be the solution to accessing cash flow when you need it so you can order on time.

Improving your inventory turnover by keeping lower stock levels—especially on slow movers—and ordering just in time, you can give your cash flow a huge boost. By partnering with a working capital provider, you can accelerate that cash flow to keep you running smoothly through all the ups and downs of a product-based business. 

Having a financing partner in place, so you can access working capital quickly, on an ongoing basis, makes it simple to tap into cash flow when you need it.

While profit can be a great way to measure the success of your business, cash flow is essential to keeping your business running.

The right inventory management strategies can dramatically improve your cash flow. Find out how just-in-time ordering and inventory turnover impact your cash. 

Improve your cash flow through better inventory management 

How optimizing inventory management can improve your cash flow 

How Optimizing Inventory Management Can Improve Your Cash Flow

Entrepreneurs and business owners may be some of the hardest-working people you’ll ever meet, but sadly, no amount of hard work can keep a business healthy if the economics are wrong. We’re not talking about the big-picture macroeconomic environment, but the 

You need to keep a close eye on your financial metrics to ensure each product line pulls its weight and every sale adds to your success, but which metrics should you use? 

Margin is the fraction of revenue left after certain expenses, but there are different ways of measuring it.

Gross margin and contribution margin are both powerful options, each helping you understand your business in a different way. Gross margin shows you the percentage margin left over in your business as a whole after direct costs have been removed. Contribution margin shows you the dollar amount each individual unit contributes to your fixed costs and 

 after accounting for variable costs for that unit.

Here’s a quick side-by-side comparison, and then we’ll take a closer look at what these metrics mean, how to use them, and how both are calculated (or 

jump down to our Gross margin calculator or Contribution margin calculator 

Gross margin is a financial metric that shows how much money a company has left over after it pays for the direct costs of producing its goods or services. In other words, it's the difference between a company's revenue and the cost of the materials, labor, and other expenses that are directly tied to making its products or delivering its services.

For example, let's say a bakery sells $1,000 worth of cakes in a month. The bakery's direct costs of making those cakes, including ingredients and labor, total $500. The gross margin for the bakery would be $500 (more commonly expressed as a 50% margin), which is the revenue of $1,000 minus the direct costs of $500. This means that the bakery has $500 left over to pay for its overhead expenses, like rent, utilities, and marketing.

Gross margin is an important metric for businesses because it helps them understand how efficiently they produce and sell their products or services. By tracking gross margin over time, companies can make strategic decisions to optimize their operations and increase profitability.

Revenue - Cost of goods sold (also called COGS) = Gross margin

You can see that the formula itself is pretty simple, so let’s dig into the different elements to make sure you start with the right numbers; then, we’ll take a look at how you can use gross margin to improve the profitability and sustainability of your business. 

Revenue is a pretty straightforward metric, but there are a couple of options when it comes to the gross margin formula. Gross margin can be calculated using either gross revenue or net sales. Gross revenue is the total revenue brought in from sales activity, while net sales is basically gross revenue minus (or 

Using net sales to calculate gross margin will paint a more accurate picture, as your typical discounts, returns, and allowances should be kept in mind when thinking about your margins and profitability. For 

 and retailers who have high returns, or SaaS companies offering annual discounts, these numbers can be the difference between profits and losses. You need to be aware so you can price accordingly. 

That said, if your company has very little in the way of discounting or returns, or you’re running a quick calculation and don’t have all that information in front of you, gross revenue could be a reasonable stand-in. 

Cost of goods sold is exactly what it sounds like. It represents the total cost of producing and delivering goods to customers, including the direct cost of materials, labor, and manufacturing overheads. COGS is typically measured over a specific period, such as a month, quarter, or year, which will match the revenue period you use.

To calculate COGS, you need to factor in all the direct costs incurred during the production process, including raw materials, direct labor, and manufacturing overheads like rent and utilities. It's important to note that only costs that are directly attributable to the production process should be included in COGS. Other expenses, such as marketing and administrative costs, are not included in COGS as they are not directly related to the production process. 

While these numbers make sense for companies that sell a product, what about SaaS and service businesses? When you sell a service, you need to factor in the direct labor costs involved in delivering that service, including wages and salaries of the employees who perform the service, as well as any sales commissions paid to reps who bring in new customers. 

Software licenses and hosting costs are another direct cost of delivering a SaaS service. By including these costs in their COGS calculations, SaaS and service businesses can get a more accurate picture of the true cost of delivering their services and make more informed decisions about pricing and profitability.

Just a quick note on two terms you may hear used interchangeably. Gross margin, as we calculated above, is the amount left over after COGS are subtracted from revenue. The gross margin ratio is the percentage of each dollar retained as gross profit, which is calculated by dividing the gross margin by revenue. Using the example above, our bakery had $1000 in revenue and $500 in COGS, leaving a $500 gross margin. We divide that $500 by $1000 to arrive at the gross margin ratio of 50% (after multiplying by 100 to get a whole number percentage)

Gross margin is a very important metric to help entrepreneurs and operators understand their business in several ways. Gross margin gives you:

Entrepreneurs and business owners may be some of the hardest-working people you’ll ever meet.

Get a better understanding of gross margin and contribution margin and use our free calculator to help you calculate these metrics in your own business.

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