Inventory and cash · Fictional example
Should you reorder stock or protect cash to pay suppliers?
Short answer: before buying again, compare stock on hand, actual demand, payment dates and expected collections. Inventory has economic value, but it cannot pay a supplier until it turns into cash.
A small example you can recalculate
Imagine a shop holding 80 units, each purchased for USD 12. Its recent sell-through is 20 units per month, at a selling price of USD 20. A USD 700 supplier bill is due, while the shop has only USD 500 cash on hand. These are invented numbers, not a client case.
| Indicator | Calculation | Meaning |
|---|---|---|
| Stock at purchase cost | 80 × 12 = USD 960 | Merchandise, not cash |
| Simple unit coverage | 80 ÷ 20 = 4 months | Assuming unchanged demand; not formal inventory days |
| Cash available today | USD 500 | Ready to meet near-term obligations |
| Supplier payment due | USD 700 | A cash requirement, not an accounting margin |
| Immediate shortfall, before collections | 700 − 500 = USD 200 | Not proof of insolvency; other flows need review |
| Hypothetical cash-funded reorder | 20 × 12 = USD 240 | Adds stock and consumes cash |
How a new purchase changes the cash problem
If the shop reorders 20 units and pays immediately, its near-term shortfall rises from USD 200 to USD 440 (700 + 240 − 500), before new collections. Selling one existing unit for USD 20 could bring in USD 20 of cash when promptly collected; that is not USD 20 of profit, and those sales are not guaranteed before the invoice is due.
Three questions before reordering
- When are payments due? List supplier invoices, wages, rent, taxes and expected collections by actual date. A calendar of cash movements is more useful than one total balance.
- Which items are actually selling? Check units sold per item and returns. An average four-month coverage can hide shortages of one item and excess stock of another.
- What is the reorder point? In a simplified illustration, 20 units per 30 days, a 15-day supply lead time and 6 units of reserve imply 20 ÷ 30 × 15 + 6 = 16 units. Actual demand and delivery times may vary.
Do not confuse coverage, turnover and cash
The four-month simple coverage calculation is not the formal days-in-inventory accounting ratio. Standard turnover uses cost of goods sold and average inventory for the same period. Cash planning also needs expenses, taxes, credit terms, seasonality, payment dates and uncertain sales.
What to do next
The choice is not always «buy less». It is to separate the stock you need to avoid shortages from the cash you need to keep operating. Check individual items, cash dates and alternatives before ordering.
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For a related distinction, read our example of growing sales but shrinking cash and our guide to gross, contribution and net margin.
Source and method
The definitions of inventory turnover and days in inventory follow OpenStax. This page’s numerical scenario, simple coverage and reorder point are original illustrative examples, not forecasts or personalized business advice.
· Original fictional exercise by the JFCarpio.com team. No client data or implied client outcomes.