Kostecke CPA

9 Tips to Manage Inventory (Don’t Let It Manage You)

Manage inventory

You Have Inventory If…

If your business makes physical things, or sells physical things, or both, you have inventory. Your inventory enables you to meet customer demand. If you do not have an item in stock, you may lose a sale, and maybe a customer as well. If you employ people full-time to help you make things, and you run out of materials from which to make them, your people will get paid but your business may not if the order is not fulfilled in time. It is important to make sure you have enough inventory, but sometimes it’s even more important to make sure you don’t have too much inventory.

Why Manage Inventory?

Why is inventory control so important?

  • Cash Flow – Inventory costs money.
  • Obsolescence – Inventory becomes obsolete over time. Materials break down, food goes stale, fashions change, so when you’re stuck with old inventory you may have to discount it heavily or literally throw it away, adding to your cost.
  • Damage and Other Losses – The more inventory you have, the easier it is to lose track of, and the longer it hangs around the greater chance that it will be damaged and unsaleable.

When you’re figuring out how much and when to buy inventory, you are probably considering things like how much you have sold in the past, and how many items you have on hand. There might be quantity discounts that you try to get to lower cost.

Other Things to Consider – 9 Tips

Storage Cost

Sometimes prices for a material or item are increasing, and you know you’ll use or sell everything you buy, and so it seems smart to buy now. However, it may not be a good thing to do if you end up with so much that you need to buy extra storage space to keep it in.

Time Until Obsolete

Does the item have an expiration date?  In a sense, even though it’s not stamped on the package, everything has an expiration date. Think about this hard before you buy more than you need, and certainly more than can be used up within 6 months.

Availability

There can be scarcities of supply in the marketplace from time to time. If you know you have demand for something that you can buy now but may not be able to buy in a month, it may be a good idea to stock up. Just make sure you understand the market and how long the scarcity may last versus how much you will need over that time period.

Lead Time

If your vendor can deliver the item within hours, and their supply is fairly stable, why would you need to stock much in your warehouse or store? Conversely, if your vendor is overseas and your supply comes in on a ship, you will need to keep some extra inventory on hand, or look for another vendor to use in a pinch.

Are Substitutions Available?

If you run out of an item, is there something else you can sell or use instead if you have a stock outage? Are there other suppliers you can go to if your primary supplier is out?

New Items

If you are considering offering a new item for sale in your store, proceed with caution. This may turn out to be the best move you’ve ever made, but it may be a flop. Will this item displace an existing item in your store affecting that inventory as well? Do your homework. Ask or find out how this item has sold in other locations. If possible, purchase a small quantity of inventory to try it out with your customers before taking a full order. Make sure you can return new items later for credit.

Consignment

Evaluate whether this is an option and whether it is economically and administratively feasible for your operation. With consignment inventory, you don’t pay for it until you sell it. However, the cost per unit for consignment inventory is probably higher, and keeping track of consignment inventory may also cost more.

Payment Terms

When you’re deciding on a supplier, ask about their payment terms. Some suppliers want to be paid upon delivery, others will give you 30 days to pay or more. If you are required to pay your supplier several months  before you can sell the item and collect cash for it, cash flow will suffer. Shoot for either matching the cash outflow for the item to the cash inflow for its sale, or even exceeding that.

Historical Analysis

You probably have a gut feel for which items are moving and which are not in your inventory. However, you may be missing some things if you don’t actually look at the data. It is true that you can’t rely solely on history to predict the future, but history, especially recent history, provides valuable insight into your inventory needs. Review the details of your inventory, including recent sales and sales trends (usage trends if you are manufacturing) item-by-item. If an item is not selling, find out why, and take steps to address it, whether it means returning it to your supplier or putting it on clearance. If an item is constantly out-of-stock, make sure you adjust your ordering frequency so you don’t lose sales. A detailed review of inventory needs to happen frequently (could be daily or weekly, depending on your business) or you will run out of options for addressing any issues. Invest in tools and/or people to help you manage this review.

There are many things to consider when you are purchasing inventory. Don’t get carried away by the sales pitch. Use your analytical skills and tools to make good decision on what to buy, when to buy it, and how much to get. Evaluate your purchase quantities not only on price, but also on your knowledge of the marketplace and your own business. Recognize your constraints as far as cash flow and storage. Investing your time and resources into managing your inventory will pay off in lower costs and lower waste.

 
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