Small businesses thrive on the relationships they build with customers and product suppliers. However, at any moment, these relationships can struggle due to the lack of proper inventory management. To prevent a shortage or surplus of your company’s products, managing your inventory on a regular basis helps your business thrive in areas such as customer service, theft control, financial management, and supply and demand. In the content below, we explore in depth the importance of inventory management for small businesses.
Why is Inventory Management Important?
Having either too much or not enough inventory affects your business and revenue. When merchandise is out of stock, you let customers down. In the event you overstock your warehouse with slow-moving products, your profit margin suffers. Additionally, effective inventory management affects warehousing costs and your ability to fulfill orders accurately and on time. Unfortunately, inventory management is a difficult business process to do by hand. It takes time, and any mistakes could negatively impact your business for months or years. Therefore, to avoid the above scenarios, several basic inventory management principles can help your small business find the right balance of inventory in your warehouse and on your shelves.
Inventory management is crucial to customer service because it prevents mistakes such as allowing customers to order products no longer in stock. Additionally, thorough inventory management systems assist you in tracking production and backorders. As a result, you can tell interested customers when the product will be in stock. Backorders, or orders placed while a product is not available for shipment, are also useful for tracking demand, allowing you to improve the availability of high-demand items.
Use the FIFO (First In, First Out) Approach
Inventory management for any type of business vastly improves when you apply the FIFO approach. Add newer inventory to the back of your warehouse or storage system so that older products remain at the front. This allows you to sell your products in the same chronological order as they were purchased or created. As a result, if your business operates with perishable goods, you won’t experience an increase in unnoticed products that expire and lower your profit margin.
Maintain Quality Control
No matter your specialty or industry, it’s important to ensure that all your products look great and work well. Quality control could be as simple as having employees do a quick examination during stock audits that includes a checklist for signs of damage and correct product labeling. Doing so helps you know which products are sellable and unfit for purchase before shipments leave your warehouse.
While not always an issue for small businesses, especially those operating primarily on the web, theft control is important when you start hiring employees or open a brick-and-mortar storefront. Inventory management allows you to see the number of products you have at any given time and the associated revenue made from sales. Furthermore, it’s easy to notice when something goes missing.
In addition to customer service and theft control, tracking how many products you sell improves your bookkeeping and budgeting by reducing inventory shrinkage and establishing a reorder point (ROP).
Reduce Inventory Shrinkage
Inventory shrinkage is the difference between how many products you physically have in stock and what your inventory management software or hand counts recorded. Inventory shrinkage may be due to lost or stolen products, broken workflows, or an error in calculation. Furthermore, such inaccuracies occur more often when inventory is hand-counted in lieu of using inventory management software. Many companies overlay cycle counting, a form of hand counting, with their inventory management software to ensure inventory is always accurate and never in question.
Establish a Reorder Point (ROP)
To avoid running out of stock, establish a reorder point for your products, especially for inventory high in demand. A reorder point refers to when a specific product’s inventory drops below the preset threshold and notifies you to order more. Be sure to establish a reorder point slightly higher than the care minimum to keep in consideration the amount of time needed to order and receive the new inventory. As a result, this helps you ensure that you can seamlessly continue to sell and ship orders to customers without interruption.
Calculate your reorder point by multiplying the average time it takes to receive inventory (in days) by your average daily sale of that item (in units). Then, add your available safety stock to that number to generate your reorder point.
Understand Proper Accounting Methods
Cash basis and accrual basis accounting are the two primary methods for managing and recording income and expenses for a small business. As an owner of a small business that stocks inventory items and sells them to the public, you must use accrual basis accounting.
Supply and Demand
To further build both financial and inventory management for your small business, consider each product’s supply and demand.
Identify Low-Turn Stock
If you have unsold stock from within the last six months to one year, stop restocking that product and discontinue it. Additionally, consider different strategies for getting rid of that stock (like a special discount or clearance) as excess stock wastes both your warehouse space and capital.
Measure Inventory Management KPIs
Key Performance Indicators (KPIs) are a measurable way to determine the efficiency of your current inventory management. One of the most important inventory KPIs to manage as a wholesale distributor is inventory turnover ratio. Divide the cost of goods sold (COGS) or net sales by your average inventory. The resulting number indicates how fast your inventory sells. Then, compare your average with other competitors in your industry and see where there’s room for improvement.
Implement the “ABC Analysis” Approach
The ABC approach requires you to classify each type of inventory as one of three categories: A, B or C. Typically, “A” products rank most valuable as your best sellers. “B” products rank with a medium but stable consumption value. Finally, “C” products are purchased the least.
Additionally, calculate the annual consumption value of a product by multiplying the annual demand by the item cost per unit. Naturally, products classified in the “A” category should undergo tight inventory control and never run out of stock since these are your most frequently ordered and in high demand.
Fine-Tune Your Forecasting
Accurate forecasting is vital. Your projected sales calculations should be based on factors such as historical sales figures, market trends, predicted growth and the economy, promotions, and marketing efforts.
Delegate and Outsource Bookkeeping Tasks
While you pay more attention to managing your inventory effectively, let the bookkeeping experts help your business operation in other ways!
At Remote Quality Bookkeeping, we provide cost-effective, efficient, and accurate bookkeeping services for small businesses and franchisees throughout the United States. Every one of our customers receive a team of trained and specialized staff to meet business needs, perfect for conquering day-to-day operations.
If you have any further questions, do not hesitate to reach out at (866) 567-4258 or via our online contact form!