A company’s inventory management is a crucial part of its profitability, but many small businesses don’t practice good inventory management when it comes to the products they sell. The shortage of inventory in some businesses means they are unable to supply enough available products to meet customer expectations. Often, this drives customers away, sometimes permanently to other businesses.
Alternatively, some businesses go the other way, overstocking items just in case. Although your customers will always have the items they need, this strategy may lead to you losing money. In addition to tying up valuable cash flow, excess inventory also costs more to store and track.
Inventory management lies somewhere between these two extremes. It takes more work and planning to achieve an efficient management process, but your profits will reflect your efforts.
The following are tips to help you effectively manage your inventory for increased profitability and cash flow.
- Determine which items are most important.
Inventory can be classified into priority groups to help you understand what items you need to order more of and more frequently, as well as those that are important to your business but may cost more and move more slowly. Typically, our Baton Rouge, LA accountant suggests separating your inventory into groups A, B, and C. A-group items are higher-ticket items that you need fewer of. The C category includes items with lower costs that sell quickly. B items fall in the middle: they have a moderate price and move out the door more slowly than C items but quicker than A items.
- Monitor all product information.
Keeping track of product information is important for inventory management. Information should include SKUs, barcodes, suppliers, countries of origin, and lot numbers. Consider also tracking the cost of each item over time so you’re aware of factors that may affect the cost, like scarcity and seasonality.
- Conduct an inventory audit.
Businesses sometimes conduct a comprehensive count once a year. Other companies spot-check their hottest items monthly, weekly, or even daily. Many do all three. Regularly check your inventory to ensure it matches what you think you have, regardless of how often you do it.
- Analyze the performance of suppliers.
Inventory problems can be caused by an unreliable supplier. If your supplier is habitually late with deliveries or frequently shorts your orders, it’s time for you to take action. Discuss the issues with your supplier and figure out what the problem is. As a result, you may need to switch partners, or you may run out of inventory due to uncertain stock levels.
- Follow the 80/20 rule when dealing with inventory.
80% of your profits come from 20% of your stocks, as a general rule. For this 20%, prioritize inventory management. You should know how many of these items you sell in a week or a month, and closely monitor them. Don’t neglect the items that make you the most money; manage them properly.
- Maintain consistency in how you receive stock.
It may seem obvious to make sure incoming inventory is processed, but do you have a standard process followed by all your employees, or does each employee handle incoming stock differently? The tiniest discrepancy in how new stock is taken in could have you scratching your head at the end of the month or year, wondering why your numbers don’t align with your purchase orders. Check that all staff that receives stock does it the same way and that all boxes are verified, received, and unpacked together, accurately counted, and checked for accuracy.
- Monitor sales.
Even though this seems like a no-brainer, it goes beyond simply adding up sales at the end of the day. Keeping track of what you sell and how many items you have in stock should be done daily. In addition, this data needs to be analyzed. Are you aware of when certain items sell faster or drop off? Is it a seasonal thing? Do you sell certain items on a particular day of the week? Are certain items always sold together? Maintaining control of your inventory requires understanding not just your sales totals but how items sell as well.
- Place your own orders for restocking.
Vendors sometimes offer to reorder inventory for you. The idea seems beneficial at first glance—allowing someone else to manage the process for some of your items can save you time and staff. However, your vendors may not have the same priorities as you. They want to move their items, while you want to stock items that will be most profitable for your business. Check your inventory and order restocks for all of your items yourself.
- Invest in inventory management software.
If your business is small enough, you can manage the first eight items on this list manually with spreadsheets and notebooks. However, as your business grows, you’ll spend more time managing inventory than you do on your business or risk your stock getting out of control. Inventory management software makes all these tasks a lot easier. You should make sure that any software solution you choose meets your needs, offers the analytics your business needs, and is easy to use.
- Make use of technology that integrates well.
Stock management doesn’t have to be limited to inventory management software. Mobile scanners and POS systems can help you stay organized. Prioritize systems that work together when investing in technology. Having a POS system that can’t communicate with your inventory management software isn’t the end of the world, but you might spend a lot of time transferring data from one system to another, which can result in inaccurate inventory counts.
Inventory management is a crucial part of the financial management of your business. For more helpful information, contact our accounting firm in Baton Rouge, LA to schedule a consultation.
