A tightly controlled inventory can help a fledgling business to lap up maximum profits while minimizing wastage and other costs associated with storing too much stock. Furthermore, good long term inventory control can help a business maintain optimum cashflow and working capital levels.
The tightrope that most businesses walk with regards to inventory control is in ensuring that enough inventory is on hand to meet customer demand, while not having such a glut that the whole lot will end up spoiled or be victim of technological deterioration or changing styles.
Here are some solid inventory control tips for SME’s:
- The 80/20 Rule Applies. As in so many business areas, the 80/20 rule can be applied to inventory control. You may well notice that 20% or so of your inventory actually account for 80% of your revenues and sales. It’s important to know your A++ stock, and never run out.
- Overstocking inventory can be very dangerous. Unless you’re tapping into voracious new demand and you’re convinced you’ll be able to shift the investment you make in inventory, maintain a prudent approach to ordering your stock. Remember, for every day your inventory sits in your shop or warehouse, it’s costing you real money – and represents a real risk to your profit margin if never sold. Not overstocking is especially crucial for those companies dealing with inventory that may be easily spoiled (or otherwise time vulnerable).
- Don’t guess your inventory levels. If you’re a startup, your business plan should have some semblance of likely demand which you can peg to your inventory orders. If your SME is more established, you should be able to better gauge required inventory through experience.
- Consider seasonal changes in demand. Many product types will experience seasonal demand. Make sure your inventory control records any seasonal patterns in product demand.
- Don’t be lured into ordering excess inventory purely to capitalize on volume discounts. While a good business will certainly proactively seek volume discounts to match their trading capacity, ordering far more inventory that could comfortably be shifted is rarely a good idea.
- Shift long term inventory any way you can. Long term inventory is stock that has been sitting in the warehouse for 6 months to a year, or more. If you haven’t managed to sell stock over the span of a year, consider marking it down significantly to shift it – even if you end up at breakeven or making a small loss. Another way of shifting unsold inventory off the books is to ask the original supplier if they would be willing to offer you something for it. Other options can include offering it to staff as a bonus or incentive where appropriate.
Measuring Inventory As A Ratio – The Inventory Turnover Rato
To have a better understanding of how efficient your inventory control is, you can use the Inventory Turnover Ratio. This calculation measures how liquid your inventory is and is calculated by dividing net sales by inventory.
A higher Inventory Turnover Ratio is generally preferred to a lower one – a higher number signifies that your business is efficiently turning inventory into sales, while a lower number indicates that there may be older, obsolete stocks squatting on the company’s books. Monitoring the Inventory Turnover Ratio is a good way of checking up on how smoothly your inventory is being controlled.