Business inventory is the lifeblood of a business. Without it, a business cannot exist to deliver its product or service. It is the product or service that engages the customer to make an exchange or a transaction with the business.
Inventory is a big part of maintaining and doing business. Its importance is very much realized, especially if the business offers a product and distributes it to its target market. Whether the product is sold at retail or wholesale, a lot of customers come back to the business for them to buy a quality product that the business provides. This aspect of operational management encompasses cash flow management, materials resource planning (MRP), enterprise resource planning (ERP), procurement, and a whole lot more.
“Inventory is your business’ best friend,” says Lee Schwartz of Schwartz Profitability Group. In his article entitled “Driving Profitability by Managing Your Biggest Asset”, he recounts the importance of inventory management. Emphasizing that inventory makes up 20% of a company’s assets, Schwartz points out that space may not be the biggest issue of all; handling inventory may just be.
Due to its importance, inventory management is a crucial skill/lesson to learn and master for a business owner or anyone tasked to deal with the inventory. Inventory management best practices are also important to implement to avoid some common problems regarding inventory.
Too much or too less?
One common problem is determining the size of the inventory for a specific time. An inventory for a specific period should be enough to be distributed to the returning customers of the business. At the same time, there should be a few extra for new customers. The best way to determine the inventory size is to reference sales from a season or the recent period. If a particular product seems to sell very well in a period, it is sensible to add a slightly larger amount of the same product in the inventory. In reverse, a product that doesn’t sell well can have a limited number in the stock.
Another issue that may arise is either the lack or excessive items in the inventory. This is a result of the wrong determination of inventory size or product forecasting. For a business with less inventory, a business can lose its current customers (and even potential ones) if they cannot deliver the product promptly. On the other hand, excess inventory can also cause a problem, especially if the product is no longer sought and bought. In this case, the inventory can be discounted, donated or can be written off as a deduction. Gary Smith of NAEIR says that your excess and unmoved products can be written off as a donation or a tax deduction, depending on the product and the business. Donation is a good idea for perishable products and outdated merchandise if they weren’t moved by a store sale or discount.
Another way to deal with too many items is to sell them at a lower cost. This way can enable to recover a fraction of the cost, depending on the calculations. The bottom line is that these items can be moved to clear some space (which can be costly) and they are properly redirected without any wrong or burden on the part of the business.
In any way, the business should have a clear idea of how much inventory it has at the moment and should have the ability to track it, suggests Barney Cohen of Business 360 Northwest. He also suggests that the inventory and its items are attuned to the customer’s needs and requirements. You could determine this by asking for feedback about products or asking for any products that they would like to see in your store.
Problems involving inventory tracking are another possibility. The delivery of goods to the business may experience some issues – from insufficient number, improper handling, wrong items to misplacement. Nowadays, a business can use technology to track the items it received from another company or place. This technology can come as free or even cheap in the form of an online tracking system or apps specifically built for this purpose. Counter checking the items can also be done using the said technology, making the process more streamlined, efficient and convenient. Of course, every item has to have a tracking number or an identification code that needs to put in a program – another excellent suggestion by Cohen.
Using an Enterprise Resource Planning System
Too much inventory on hand leads to issues with cash flow, while not having enough can result in backorders and cancellations. Visibility into inventory and forecasting is critical to a healthy operation. Then add to that the need to manage inventory across channels. If a customer calls up and places and order with a sales rep, does that inventory also come out of the company’s eCommerce store? If inventory doesn’t automatically update across channels, a company can end up selling the same item twice, leading to angry customers. An integrated enterprise resource planning (ERP) system such as that of Third Wave and others can help a company avoid or mitigate these pitfalls. It can help with workflow management and allow business leaders to see into and across the operation, including inventory management. This system will enable you to determine trends in sales, optimize your inventory, and enhance your forecasting to ensure supply and demand synchronization.
Inventory and Cash Management
Meanwhile, Ken Boyd, author of “Cost Accounting for Dummies”, “Accounting All-In-One for Dummies” and “The CPA Exam for Dummies”, reiterates the importance of cash management, reliable vendors and physical inventory counts.
- Connecting Inventory to Cash Management: Typically, accounts receivable and inventory are the two accounts that tie up the largest amount of cash. It’s critical that businesses understand inventory turnover: (cost of sales/ average inventory). The goal is to maximize the numerator (cost of
sales) and minimize the denominator (inventory cost). A firm wants to sell and replace inventory as often as possible. This approach minimizes the dollars invested in inventory. - Reliable vendors: Companies need vendors who supply a quality product and a reasonable price- and deliver the product in a timely manner. All firms should review their vendors, to see if they meet these criteria. While changing vendors is difficult, all businesses should consider a change if a vendor is not reliable.
- Physical inventory counts: The most reliable inventory management tool is a physical count of inventory. While auditors typically require an inventory count at year-end, all companies should consider counting inventory more often – as often as monthly. You have a huge dollar investment in inventory- make sure that you count it.
On the other hand, in managing their inventory, Fortress Geek’s Tao Wong states that one of the best changes they implemented was creating a ‘bestsellers’ shelf in their warehouse that was close to the packing and receiving area. It allowed them to stock items that were constantly moving in and out of the warehouse very close to where it was needed and reduced their overall receiving and packing time.
Inventory can be a daunting task, but it is possible to wrestle it into a more manageable level. Use everything on hand, such as technology and a clear mind can help in managing and keeping tame the inventory of your business.
