The Importance of Inventory Management
For product-based businesses, there is nothing more critical than your inventory. That is what is making you money! Inventory may make up as much as 25% of a company’s assets!
However, it may be hard to know how to properly organize and manage your inventory. You may be missing pieces of information that directly relate to your profit margins. You may be expanding your products, but not seeing results.
This article will go into why inventory management is so important and how to make sure that you are paying attention to the right details.
At JKCPA, we have worked with countless small and medium-sized product businesses and have offered strategic advice on their financial operations. We empower our clients to understand their finances and to make informed choices to grow their brands. Learn more about how we can help you by booking a call here.
The True Cost of Inventory
Purchasing the raw products is just one part of the true cost of your inventory.
However, there are many other costs associated with your inventory. Where are they being stored? Too much inventory means more space is needed for storage. What about protecting your inventory against theft or damage? Higher inventory levels equal higher insurance premiums.
Finding the Perfect Balance
Inventory can be tricky and it’s all about finding that perfect balance.
On one hand, there is such thing as too much of a good thing. Tying up your company’s capital in stock may be dangerous if a challenge suddenly arises. Companies that last are the ones that have some financial flexibility.
On the other hand, you certainly don’t want to run out. That is the quickest way to send a customer to one of your competitors!
In both instances, the result is the same. Poor inventory management has the potential to negatively impact your business.
The sweet spot is balancing the levels that your customers need with low capital investments. Can it be done?
Looking to the Future
Ideally, we could all look into the future and know exactly what kind of sales our businesses will see and stock accordingly.
Realistically, predicting sales is a little more complicated than that. Therefore, many companies will keep “safety stock” or a set amount of inventory to keep things running smoothly.
There are various forecasting models and most businesses have their sales fluctuate throughout the year. Different variables come into play, like the seasonality of your products or changing trends within your industry. Many factors can disrupt the supply chain, from increasing extreme weather conditions to the recent border closures.
The secret, then, is to be looking at the right KPIs to measure your current performance. That historical data will be the foundation on which future forecasting is done.
KPIs to Track
The types of figures that can be tracked is virtually endless, so you want to make sure that you’re looking at the information that is actionable and easy to connect to your goals.
Some metrics that are useful to track are:
Inventory turnover
Inventory value
Product demand
Lead time
Sounds simple enough, but usually that means you just end up with a bunch of numbers and graphs. How can you understand these KPIs and have tangible information with which to set your safety stock?
Expert Advice
At JKCPA, we thrive in turning raw numbers into actionable insights. We work with many product-based businesses and know their unique challenges. We also know that which metrics need to be tracked depends on your unique business and we tailor our approach with your company in mind.
Selling products is competitive, especially in the online space, and so strong foundations are crucial to your company’s success. Inventory management is a key element that helps small and medium businesses stay afloat in a climate of uncertainty.
Are you ready to gain control of your finances and make stronger long-term business decisions? If so, reach out today.
