Inventory and cash flow: payment terms, order size and reorder timing

For a product brand, inventory is where most of the cash goes. A profitable brand can still run out of money if it pays for stock months before it sells it. The good news is that the levers are well understood: when you pay suppliers, how much you buy at once, and when you place orders. This guide works through each with numbers.

Key takeaways

• The cash conversion cycle — days inventory outstanding plus days to collect, minus days you take to pay suppliers — is how long each dollar is tied up between paying for stock and getting it back.
• Payment terms can matter as much as price. Moving from a deposit-and-balance-before-shipment arrangement to net terms after delivery can change cash tied up by months.
• Smaller, more frequent orders reduce average inventory. Volume discounts are worth taking only when the saving beats the carrying cost and the demand is reliable.
• Ordering too early ties up cash; ordering too late costs sales or expensive freight. Order-by dates are the middle path.
• Set an open-to-buy budget and fund the products most likely to stock out first.

The cash conversion cycle

cash conversion cycle = DIO + DSO − DPO

• DIO (days inventory outstanding): how long stock sits before it sells.
• DSO (days sales outstanding): how long after a sale the cash reaches your bank. For a direct-to-consumer brand this is usually just the payment processor's payout delay; wholesale customers on terms add far more.
• DPO (days payables outstanding): how long after receiving stock you pay for it.

Example: a brand holds 90 days of stock, gets paid out 3 days after each sale, and pays its suppliers 30 days after delivery.

90 + 3 − 30 = 63 days

Each dollar spent on stock is away for about 63 days. Shorten DIO or lengthen DPO and the cycle shrinks; a negative cycle means customers pay you before you pay your suppliers.

Deposits versus net terms

Many brands buying from overseas manufacturers pay a deposit when the order is placed and the balance before the goods ship. That means paying for stock long before it arrives, let alone sells. Here's the effect on a single $50,000 purchase order.

Assumptions: 30% deposit at order (day 0); 70% balance before shipment at day 45; 30 days in transit, so stock arrives on day 75; it sells evenly over the following 90 days (days 75 to 165), so the average unit sells around day 120.

Weighted average days the cash is tied up:

(15,000 × 120 + 35,000 × 75) ÷ 50,000
= (1,800,000 + 2,625,000) ÷ 50,000
= 88.5 days

Now suppose the same supplier agrees to net 60 from delivery: the full $50,000 is paid on day 75 + 60 = 135. The average unit sold on day 120, so you've collected cash for the average unit 15 days before you pay for it. The cash tied up has gone from 88.5 days to roughly zero.

Real terms usually sit somewhere between these extremes, but the example shows why payment terms deserve as much negotiating effort as unit price. Things worth asking for:

• A smaller deposit, or no deposit for repeat orders once you have a track record.
• Balance due on arrival, or a set number of days after the bill of lading, rather than before shipment.
• Net 30 or net 60 terms from domestic suppliers and distributors.
• Staggered deliveries against one order, so you pay for stock closer to when you'll sell it.

Early payment discounts

Some suppliers offer a discount for paying early — for example "2/10 net 30": 2% off if you pay within 10 days, otherwise the full amount in 30. Paying 20 days early to save 2% is equivalent to an annual return of roughly:

(2 ÷ 98) × (365 ÷ 20) ≈ 0.0204 × 18.25 ≈ 37%

If you have spare cash, that's an excellent return. If you'd need to borrow or skip a reorder to pay early, compare it with that cost instead.

Order size: cycle stock and volume discounts

Average cycle stock is roughly half the order quantity, because stock runs down from a full delivery to near zero before the next one.

Example: a product line costs you $30,000 a month at cost.

• Order every three months: each order is $90,000, average cycle stock about $45,000.
• Order monthly: each order is $30,000, average cycle stock about $15,000.

Same sales, $30,000 less cash in stock — though freight costs, minimum order quantities and the time spent placing orders push the other way.

When is a volume discount worth it?

A supplier sells a product at $10 a unit on three-month orders, or $9.50 if you order six months at a time. You sell 1,000 units a month.

• Over six months, three-month ordering costs 6,000 × $10 = $60,000; six-month ordering costs 6,000 × $9.50 = $57,000. Saving: $3,000.
• Average cycle stock with three-month orders: 3,000 ÷ 2 = 1,500 units × $10 = $15,000.
• Average cycle stock with six-month orders: 6,000 ÷ 2 = 3,000 units × $9.50 = $28,500.
• Extra cash tied up: $28,500 − $15,000 = $13,500.

Pick a carrying-cost rate that reflects your cost of capital, storage and risk. At an assumed 25% a year, carrying the extra $13,500 for six months costs 13,500 × 0.25 × 0.5 ≈ $1,690. The discount wins by about $1,310.

But that assumes demand holds. If the product slows and 1,000 units are left at the end, that's $9,500 of stock sitting idle — several times the saving. Take volume discounts on steady, important products (the AX products in an ABC-XYZ analysis), and be cautious on everything else.

Reorder timing

Ordering earlier than you need to is a quiet cash drain; ordering late is a loud one. The order-by date for a product is the latest you can order and still receive stock before you dip into safety stock:

days until stockout = available ÷ daily demand
order-by = days until stockout − lead time − safety days

A product with 600 available, selling 20 a day, runs out in 600 ÷ 20 = 30 days. With a 21-day lead time and 5 safety days, the order-by date is 30 − 21 − 5 = 4 days from now.

Ordering ten days earlier than that "just in case" doesn't change how much you'll sell; it just means paying for stock sooner. Ordering ten days late may mean six days out of stock, or paying for air freight to close the gap. Knowing the date for each product lets you hold cash until it's needed without gambling on availability.

Open-to-buy: spending a fixed budget well

Most brands can't fund every reorder suggestion at once. An open-to-buy budget sets how much you'll spend on stock in a period; the question is how to allocate it.

Example: your budget this month is $20,000 and reorder suggestions total $28,000.

Fund in order of urgency: A ($9,000) is already inside its lead time and will stock out regardless, so order now and consider expediting. B ($8,000) must be ordered within days. That's $17,000. C has 40 days of cover against a 14-day lead time, so it can wait for next month's budget. D's 30-day lead time and 55 days of cover leave about 25 days of slack, so it can also wait. The remaining $3,000 can part-fund C or sit as a buffer.

The principle: spend scarce cash on the products that will stock out soonest relative to their lead time, weighted by the revenue at risk, and let the rest wait.

Where Stokrio fits

Stokrio's replenishment shows an order-by date and revenue at risk for each product, and a fit-to-budget option that funds the products most likely to stock out first within the open-to-buy amount you enter. The demand and supply plan shows opening stock, demand, incoming purchase orders and recommended receipts by month — the basis for a cash forecast your accountant will recognise.