Inventory management may, on the face of it, seem like one of the least interesting processes to think about when running and managing a business, but if you were told that you could be saving a considerable amount every month, would that make you more interested? If you work for or run a company that sells physical goods, then proper inventory management can make or break your accounts. At its most basic level, your level of inventory correlates with your potential to make a profit, and every time you sell an item, you’ll make more. This theory works to the point where your inventory surpasses demand, and then you’re at the point where you may have stock on the shelves and can’t sell it. Your stock needs to be stored somewhere, which also costs money, which is where being lean and flexible with your inventory management becomes vital.
What’s inventory management?
Managing inventory goes all the way from monitoring how much stock you’ve ordered, how much is in storage, and the weight, amounts, and locations of each unit. With this information, you can calculate how much you’re spending on the stock that’s currently being held, and then minimize how much you’re paying by calculating when it will be bought, and replenishing it at the right time.
Why should you care?
As mentioned above, proper inventory management can both save and lose your money. Gross mismanagement could result in serious cash flow issues, and even cause a company to go out of business. This may be through missing out on sales, not being able to fulfill orders, or having too much stock and not enough demand to buy it. When you manage your inventory properly, there are several mistakes you can avoid:
#1 Stop goods from spoiling.
This only applies if you sell a product that has an expiry date, but many goods have a limited window where they can be used or consumed. Examples include items like makeup, food, or supplements, which, if not managed correctly, won’t be fit to sell, and you’ll lose a significant amount of cash if you can’t sell your stock in time.
#2 Stop dead stock issues.
Similar to goods that spoil, ‘deadstock’ is the term used for items that can no longer be sold for other reasons. It may be because they are no longer on-trend or in season, for example. This is why you see deep sales between seasons as companies try to minimize how much stock is held, even if they are no longer making a profit on it.
#3 Minimize storage costs.
The additional cost of acquiring stock that’s sometimes not taken into account in the initial profit and loss equations is the cost of storing inventory before it’s sold. Warehouse costs are a variable cost, rather than a fixed cost depending on how much stock you need, which needs to be estimated. When you’re only selling enough to warrant one warehouse, your profit will increase until you need to add a second one. Then, all of a sudden, your costs increase significantly, but you may only be using 10% of it. Intelligent inventory management will have you working at the limit of your single warehouse until its apparent demand is high enough to add the additional cost.
How Inventory Management Helps Cash Flow?
There are a few other ways that inventory management helps with the cash flow of your business. You pay for inventory with cash, and then sell it at a profit when it becomes cash again. When your inventory is in storage, it’s an asset and can’t be traded for other goods. This means that if you’re running a lean business and investing most of your profits into new stock, you’ll have times when you’re cash-poor, but asset-rich. This is good, assuming that you can sell all of your goods, but puts you at risk of not having enough money to pay for your fixed costs like wages and rent if you don’t sell your products on time.
There are two essential parts of the inventory management puzzle that you want to invest in, the first being a robust inventory management program like Lilypad for fishbowl.
This will help to take a lot of the guesswork out of your inventory management and will help you to predict exactly when you need to order new stock. In addition, this can be linked to your accounting system, which will help with your cash flow management. Having this in place will make sure that your business is set up to handle the bumps of reality in supply and demand.
The second thing to invest in is your understanding of inventory management techniques that will help you make the most out of your software. There are many different techniques, but some of the most important to get started are ‘first in, first out,’ which means that you always sell the oldest stock first and work your way through to older stock. This is particularly important if you’re working with perishable goods to minimize wastage through spoilage.
Another technique that’s vital to refine is contingency planning. A lot of inventory management software assumes stable outside factors that are simply not true in real life, which is where you, as a manager, need to be able to adapt. Factors that may affect your inventory in unexpected ways include a surprise spike in sales, a cash flow issue, your main supplier going bust, or a product that isn’t selling quickly, causing increased storage costs. All of these situations are a serious risk to the business if there’s no plan in place to counteract them. Experience will be your most prominent teacher, but being aware of these things can mean that you adapt before they become an issue.