Why Inventory Management Matters
Inventory is the lifeblood of any products-based business. It’s the top capital expense, the vehicle for profits, and the very reason customers interact with a company in the first place. No inventory, no business. It’s just that simple. Yet despite the vital impact of inventory, far too many organizations rely on bare bones inventory management systems. According to the 2017 State of Small Business report by WASP Barcode, 43 percent of SMBs either do not track inventory or use a manual process for tracking. In today’s marketplace, opting for barebones inventory management puts a business at a distinct disadvantage against it competitors.
Truth be told, inventory management has always mattered. The National Federation of Independent Businesses notes that 82 percent of small business failures are due at least in part to cash flow problems, and inventory and cash flow are inextricably linked. But today, in a world of ever-increasing consumer choice and multi-channel retailing, accurately tracking inventory can be the difference between winning and losing customers. There countless reasons for everyone from manufacturers to retailers to invest in quality inventory management. Here are a few of the most important.
You need to know the numbers
Big data is no longer an emergent field or niche concern; it’s a fundamental part of the way our world works. Everything from our trips to the grocery store to our streaming recommendations rely on analytics to run smoother and more efficiently. In a small business environment, so much valuable data can be derived from accurately tracking inventory.
Two simple, but crucial formulas related to inventory are the inventory turnover ratio and inventory to working capital ratio. The first is calculated by the cost of goods sold divided by the average inventory. This number lets you know how many times you turn over your average inventory in a given year, providing you a baseline metric for how effectively a business moves product. The second is a measure of liquidity, which you can calculate by dividing inventory value by working capital (accounts receivable + on-hand inventory – accounts payable). These two figures are essential snapshots of the healthy of any inventory-based business, but neither is worth anything if they aren’t based on accurate, up-to-the-minute inventory measurements. A formula only produces true results, after all, when you plug the right figures into it.
You need to see the details
In addition to providing high-level views of what’s going with stock, inventory management allows business owners to get granular. Understanding which categories of units and which items in particular move fastest is essential for businesses who rely on buying a variety of products. Many business owners don’t know that they have dead stock taking up space, wasting resources, and doing nothing of value for their business.
With modern inventory management systems, you can dice up the data in all kinds of ways. You can, for example, see which products sell on which channels–maybe a certain item is popular on a company’s Amazon marketplace, but not so hot in a physical store. Being able to analyze inventory based on multiple factors allows a business to learn about its inventory patterns in enlightening and emboldening new ways.
You need to plan for the future
Understanding inventory today and in the past allows you make better decisions going forward and why Inventory Management matters more than ever. Regular reporting allows for trend spotting and more precise inventory planning. In 2019, almost no business has the luxury of being the exclusive purveyor of what it sells. If a consumer can’t get it from you, they’re going to get it somewhere else. If you can’t forecast demand, then, you may struggle to meet it. In all aspects of business, it pays to be proactive. Inventory is no different.
Hitting and inventory balance is not a perfect science, because the future is never entirely predictable. Limiting the amount of variance, however, can be a huge win for a business. Just last month, American beverage retailers began to experience a shortage of White Claw hard seltzer. The retailers who saw the demand coming and stocked up reaped benefits and won customers, while those who didn’t wound up leaving money on the table. The manufacturer, Mark Anthony Brands, could’ve also benefited from better inventory management. Trends are fickle, and While Claw wasn’t able to capitalize on its peak popularity to the degree it could’ve.
How AccountingSuite can help
AccountingSuite’s exceptional inventory management features will allow growing businesses to gain insight about how their stock is affecting their bottom line. It’s information no entrepreneur should have to go without. Head over to our features page to find out more.