Did you know that, properly managed, customer deposits and inventory can actually help you build a lucrative CI business?
How?
Properly managed deposits and inventory help provide accurate gross margin results that gives you the evidence you need to lead your business to success. Like we mentioned here, if you notice your gross margin dips low, you can take actions such as eliminate discounts, charge more, or sell brands and categories that produce higher margins.
In short, it all comes back to managing cash flow because both customer deposits and inventory are major cash flow components. Let’s dig deeper.
It’s customary for clients to pay integrators large sums of money in advance to procure equipment, build racks, complete designs, and prepare the team for that project. Many owners consider these deposits as revenue, but we suggest considering them as a gift card.
If your grandma gets you a $25 gift card to Bass Pro Shop, Bass Pro has to hold that money as a liability until you come in and buy those heated boxers you’ve had your eye on. Once the Bass Pro cashier runs that gift card, that $25 moves from liability (on loan from customers) to revenue (belongs to the business) on the balance sheet.
In an integrator business, customer deposits are essentially a gift card that can be moved from the liability to revenue column once the work is complete.
Here are some deposit best practices we recommend to all of our clients:
- Track customer deposits as a liability until the equipment is delivered and labor complete.
- Understand that deposit cash is not your money yet.
- 30-50% of your production backlog should be in customer deposits.
- Make sure cash and assigned inventory cover deposits two to one.
Speaking of inventory, we hear over and over again that “we are not an inventory business,” and to a degree, that’s true. We don’t have the burden of stocking shelves with items we hope people will buy.
But inventory can be simple once it is fully optimized. Once properly tracked in your accounting system, it can be an asset versus an expense. And, once it’s invoiced, it becomes a cost of goods.
Implement these techniques to optimize your inventory:
- Buy smart. Don’t just stock up because you’re scared.
- Take regular inventory counts, either monthly or quarterly.
- Track inventory value on your balance sheet.
- Use the non-inventory designation to expense items you buy in bulk or don’t want to count.
When you align cost of goods sold (inventory) with revenue, you get actionable, accurate, and timely gross margin results, which, as we mentioned here, is key to finding the perfect mix for success.
And when you use that information in addition to watching deposit and inventory levels, keeping Accounts Receivable low, and making continuous profit, you can amass large sums of cash in this business.
Now, this might mean anything from a few tweaks to a massive change in your business. Luckily, here at VITAL, we have decoded the CI business model and we’d love to help your business succeed. Book a 15-minute call with us to learn more about how we can help you get onto the path for success.
Stay VITAL,
Matt & the team
