Why is Inventory Management Important for Your Small Business?

If you are running a small business, then inventory management is an important factor that affects everything from cash flow to product availability. You want to have products on hand to meet the demands of your customers. But too much inventory can cut into your bank account and make it hard to keep up with ongoing costs. There is a fine balance to decide on the right amount of inventory you should have on hand.

Thinking Ahead: Inventory Tips

Problems with inventory management can result in a variety of avoidable issues. Here are some of the potential issues you might face if you don’t have a good inventory management system in place:

  • Cost Increases: Some business owners need to increase the pricing of the product to cover the overhead expenses of too much inventory. Your per-unit pricing might change depending on availability from your suppliers and the timing that you need these products. For example, if you run short on inventory and need to rush an order, then you can expect to pay more per-unit for this last-minute request.
  • Product Depreciation: Even though you might get a price break on a bulk order, it’s possible you will encounter price depreciation if the items sit on the shelves for too long. This depreciation is especially true in industries where new products and versions are released frequently. Are you selling electronics? Then there will be a significant product depreciation when the upgraded model is released in the future.
  • Insurance Costs: The amount of inventory on-site will impact the level of insurance needed. Holding a lot of expensive inventory in your warehouse means that you need more insurance coverage to pay for the losses if something goes wrong. Your insurance provider will need details about the value of products on-site, and you can expect your monthly premiums to go up the more inventory you need covered on the policy.
  • Storage Space: Also consider the amount of storage space needed for your inventory. When the shipment arrives, do you have a place to put a few pallets of 50-pound boxes? Consider the placement of this storage and how it will affect day-to-day logistics. You will lose money if employees need to work extra hours for inventory management or if the inventory storage interferes with daily productivity.
  • Organization: Bringing in a bunch of inventory is just the first step. Do you have a system in place to find the right products when they are needed? If you are going to keep inventory on-site, then it’s critical that you have a solid system to organize the products for easy access.

Ideally, you should have just enough inventory on hand to meet customer needs, with scheduled shipments to restock at the perfect time.

How Much Extra Inventory is Costing You

Did you know that costs increase by as much as 35% for small businesses carrying extra inventory? The extra expenses might seem small, but they really add up over time – and cut into your profit margins. Carrying too much inventory might be one of the costliest mistakes you can make in your company.

Instead of buying inventory based on good intentions to sell everything as quickly as possible, you need to be deliberate in anticipating inventory needs and matching customer demand.

Looking Ahead to Anticipate Needs

Figure out the best timeline for ordering based on anticipated busy seasons and slower times of the year. For example, if you often sell a lot of product during 4th quarter (the holiday season), then make sure your inventory comes in before the sales start to increase. It doesn’t make sense to buy a lot of inventory in January if sales tend to be slow at the beginning of the year.

Every business is different, so it can be helpful to look at your annual trends in past years. Also, keep notes about your inventory management. When you find best practices, it’s smart to record your preferences so you can remember the most effective solutions for the future.

Accounting and Cash Flow Management

The most important reason you need to manage inventory is because of the way these purchases will affect your financial situation. Every business needs to reinvest profits to help the company grow. But if you reinvest too much in inventory that doesn’t sell, then you will be faced with cash flow challenges. When your money is tied up in too many boxes sitting the warehouse, then you might not have enough to pay for expected costs such as payroll, rent, utilities, and taxes.

Most business owners don’t have formal accounting or bookkeeping training. So, it’s a good idea to invest in professional accounting services to tap into advice from a team that understands how to manage business finances. Small systems can go a long way to help you stay in control of your financial situation and minimize the impact of cash flow issues that often affect business owners.

Just because you have extra cash in the bank, doesn’t mean that you should buy more inventory. Talk to your accountant to look at upcoming expenses, then decide on the best ways to reinvest a certain amount of profits. For example, if you have a lot of inventory sitting in your warehouse right now, then it might be better to spend money on marketing and promotions before you buy more products.

Tips for Improving Inventory Management

Here are a few things to consider if you are looking for ways to manage your cash flow by improving inventory management:

  1. Define Par Levels: The term “par level” references the least amount of product you need at any given time. When you have clarity about these par levels, then you can improve efficiency by knowing when it is time to restock the inventory shelves. A good strategy with par levels reduces the likelihood of reactive inventory purchases, helping to reduce unit costs and optimize your profits. Set a benchmark so your ordering practices are automatic. When inventory reaches a certain par level, then it’s a cue that you need to order the next shipment. Par levels can be set by comparing anticipated sales with shipment schedules. For example, if you sell an average of 800 widgets in the month of July and inventory is shipped weekly, then set a par level of 300.
  2. Anticipate Potential Issues: Always have a backup plan in place in case you experience issues with inventory access. Common inventory problems include selling out a certain product, a big delivery showing up early, or not having enough cash on hand to pay for the next shipment. Pay attention to your history and see if you notice patterns of the same issues coming up over and over again. Find the areas where you have the highest risk so you can create a plan to avoid these possible issues.
  3. Inventory Management Software: Consider investing in a good inventory management software so you always know how much product is on hand. Keeping track of inventory in real-time is important for preventing product shortages. The right software program can be integrated into your digital financial system, including your point-of-sale system and even financial tracking and accounting programs.
  4. First In, First Out (FIFO): As you are designing your inventory management system, be deliberate in implementing a FIFO system: first in, first out. FIFO is critical if you are selling perishable items, such as food, beauty products, or anything else with an expiration date on the package. Even nonperishable goods should be moved out with the FIFO strategy to avoid having stock that is unsellable because it is out of date. When new shipments come into the warehouse, it’s best to keep the new items in the back with the older items placed in the front.
  5. Inventory Auditing: Set specific times during the year to audit your inventory. Counting the actual number of items on-site is important to make sure the inventory matches up with the reports in your inventory management software. Additionally, pay attention to the products that aren’t selling. If you have a lot of inventory that’s been sitting on the shelf for 6 – 12 months, then it’s a good sign that you should clear the stock and minimize orders of that item in the future.

Accounting Advice to Manage Your Cash Flow

When it’s time to reorder inventory, you need to be sure that enough cash is available for the purchase. Working with an experienced accounting team is an essential step to look ahead and see how the money will flow based on your unique needs.

At Easier Accounting, we understand the financial challenges you are facing as a small business owner. If you are looking for strategies to improve cash flow and support your inventory management goals, then our team is just a phone call away! Reach out to us to schedule a consultation and learn more about these quality accounting services that can be used to support your small business needs: (888) 620-0770.

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