Improving cash flow by reducing stocks

An excellent piece in the FT yesterday focuses on how businesses are destocking as part of their cash-flow management in the downturn…

Wholesalers, retailers and manufacturers have all been hit by the downturn in demand, and many have found themselves with excess stocks. Those pictures of the giant car park of new cars at Southampton docks is a good example of over-stocking. The FT article describes some interesting examples of businesses cutting stock - particularly those who geared up for traditional peaks in seasonal demand and found the demand didnt reach anticipated levels.

Destocking by businesses across the economy is identified as a key part of the contraction in GDP in Q4 2008, and will likely contribute again in the early part of 2009. There is little point holding excess stocks, particularly if the cash that could be generated by selling stocks can be used to pay-down debt.