The Value of Inventory Management for Small Businesses

Small businesses prosper on the relationships they build with customers and product suppliers. Unfortunately, at any moment, these relationships can be strained due to the lack of proper inventory management. Managing your inventory on a regular basis will help prevent a shortage or surplus of your company’s products allowing you to thrive in areas such as customer service, financial management, theft control, and supply and demand. We will explore the importance of inventory management for small businesses below.

Why is Inventory Management Important?

Too much or not enough inventory affects your business and revenue. When product is out of stock, you let customers down. If you overstock your warehouse with slow-moving items, your profit margin will suffer. In addition, effective inventory management affects warehouse costs and your ability to fulfill orders on time and accurately. Unfortunately, inventory management is one of those business processes that is hard to do by hand. It takes, time, and mistakes could have a negative impact on your business for months and in some cases, years. To avoid the above scenarios, there are basic inventory management principles that can help your small business find the right balance of inventory in your warehouse.

FIFO Approach(First In, First Out)

Inventory management for any type of business greatly improves when you apply the FIFO (First In, First Out) approach. Add the newer inventory to the back of your warehouse system so that older products remain at the front. This allows you to sell your product in the same chronological order as they were purchased or manufactured. If your business utilizes and operates with perishable goods, you won’t experience an increase in unnoticed products that expire again lowering your profit margin.

Customer Service

Inventory management is a crucial component to great customer service because it prevents mistakes such as allowing customers to order products that are no longer in stock. Thorough inventory management systems assist you in tracking production and backorders. As a result, you can accurately tell interested customers when the product will accurately be in stock. Backorders, or orders placed while a product is unavailable for shipment, are also useful to track demand, allowing you to improve the availability of your high-demand products.

Theft Prevention

For those operating primarily on the web this may not always be an issue, but theft prevention or control is important when you start hiring employees or operate 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 from sales. Additionally, it will be relatively simple to notice when something goes missing.

Quality Control Maintenance

Regardless of your industry or specialty, it is vital to ensure that all of your products look great and function well. Quality control is as simple as having employees do a quick visual examination during stock audits that include checking for signs of damage and proper product labeling. In doing so, you will know which products are sellable and which products are unfit for sale before shipments leave your warehouse.

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. 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, you need to establish a reorder point for your products, especially for high demand inventory. A reorder point refers to when a specific product’s inventory drops below a predetermined threshold and notifies you to order more. Establish a reorder point slightly higher than than the care minimum keeping in consideration the time needed to order and receive the new inventory. The result helps you ensure that your business can continue to sell and ship orders to customers without interruption.

You can calculate your reorder point by multiplying the average time it takes to receive inventory (In days) by your average daily sale of the item (In Units). Then add your current available safety stock to that number to calculate your reorder point.

Understanding Proper Accounting Methods

Accrual basis and cash basis 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 will need to 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.

Low-Turn Stock Identification

Do you have unsold stock from within the last six months to one year? If so, stop restocking that product and consider discontinuing it. Consider different strategies for getting rid of that stock as excess stock wastes both your warehouse space and capital. You can potential reduce or eliminate stock by offering a discount or presenting a clearance sale to your shoppers.

Utilize “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.

Calculate the annual consumption value of a product by multiplying the annual demand by the item cost per unit. Products classified in the “A” category should be subject to tight inventory control and never run out of stock since will be your most frequently ordered and in high demand.

Accurate forecasting is critical to success. 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.

Inventory Management KPIs

Establishing Key Performance Indicators (KPIs) are a measurable way to monitor the efficiency of your current inventory management. One of the most important inventory KPIs to manage is inventory turnover ratio. To do so, divide the COGS (Cost of Goods Sold) or net sales by your average inventory. The result is a number that indicates how fast your inventory sells. Utilize the data to compare your average with other competitors within your industry and look for areas of improvement.

Outsource Bookkeeping Tasks

While managing your inventory management tools, let the accounting experts help your business operation grow.

At MCDA CCG Inc., we provide cost-effective, efficient, and accurate accounting services for small businesses throughout the US. We will dedicate a team of specialized staff to meet all of your business needs, partnering with you to conquer day-to-day operations.

For more information please do not hesitate to contact us today at (714) 872-2393 or schedule a call directly utilizing the link below.

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