9 Key signs that it's time to move to a robust inventory management system

Heather Smith, author of "Xero for Dummies" is back with a guest blog post that highlights nine key signs that it's time for a business to start thinking about moving to a bigger and better inventory management solution. 

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As an accountant or bookkeeper working closely with small businesses, one of the areas you can assist them with is inventory management. Inventory can grow to be a significant value on the balance sheet, and can directly affect cash flow and profits.

In this highly competitive day and age, it’s shocking to hear that 46% of small and medium businesses either don’t track inventory, or use a manual method of doing so

Here are some signs that the current inventory management solution used within a small business may be inadequate:

1. Inventory counts are a massive and costly undertaking.

This may suggest the inventory management solution is struggling to accurately keep track of the inventory. The increased time and costs may also result in inventory counts being undertaken only when required (usually annually).

2. Annual inventory counts are the only time the business has a real understanding of the volume of inventory on hand.

This means the business is lacking real data and insight about their inventory holdings, so when they come to make decisions, they really don’t have the full picture. The lack of accuracy also may lead to pilfering of stock as employees are aware it’s not being completely monitored. This may also lead to spoilage for certain types of eCommerce companies which are selling products with expiry dates, or dead stock (stock which is no longer relevant!) for companies that rely heavily on seasons or cycles.

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3. The value of inventory written off due to damage, theft or technical obsolescence is trending upwards in relation to the total inventory dollar value.

This means expenses incurred in relation to purchasing and holding inventory could be unnecessarily high.

4. Inventory holding costs are high in relation to the total inventory dollar value.

Holding too much stock could mean holding cost expenses, such as rent, insurance and security, are unnecessarily high. Apart from the evident economic costs, holding excessive stock also brings about an opportunity cost – basically, you’re restricting your cashflow which might be better utilized in other areas, and this can be especially problematic for small businesses.

5. The number of backorders is steadily growing.

This may result in additional delivery costs and unhappy clients. Remember, consumers expectations today are all about instant gratification – if they aren’t able to purchase an item from you at that moment, there’s a high chance that they’ll move right on to purchasing it from your competitor.

When this happens, you’re not just losing out on one single sale – you’re losing out on this person’s entire Customer Lifetime Value (CLV). Another factor to bear in mind is that the cost of acquiring a new customer vastly outstrips the cost of retaining an existing customer – this makes it even more important to keep your existing customers satisfied.

6. The existing inventory management solution is not integrated with the business management platform, such as the eCommerce or accounting solutions.

This results in time-consuming (and boring) double entry of data and the increased possibility of human error.

7. Staff are unable to access real-time inventory information from different locations.

This can lead to the over- or under-ordering of inventory, and additional expenses associated with managing and moving inventory between locations and to the end client.

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8. Accessing accurate, timely and relevant inventory information is difficult.

If the business doesn’t have a clear idea of factors such as what’s selling well, what’s slow-moving and what the gross profit margin is per inventory item, developing forecasts, and setting and monitoring minimum inventory stock levels is time-consuming and can lead to underquoting, lost revenue and high expenses. Conversely, having a high-level understanding of best-selling products as well as the breakdown across different stores, regions or markets will help key decision makers strategize about potential product innovations, new product lines, and more. 

9. When utilising the existing inventory management system, the small business is stretched to capacity. This means the business is unlikely to be able to cope if extra business opportunities present themselves.

Good inventory management can be the difference between a successful, thriving small business and failure. If the small business is straining under their existing inventory management solution, the benefits they may realise from implementing a suitable inventory management solution may include:

  • Accurate inventory forecasting and ordering
  • Happy and repeating customers
  • Improved cash-flow
  • Reduction in staff administrative time – freeing staff up to work on income-generating activities
  • Reduced related expenses, including inventory, insurance, rent, security and freight costs.

In your role as a small business advisor, you’re in an ideal position to identify that the existing inventory solution is not meeting the small business owner’s needs and talk to your client about current and future inventory management strategies.

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See Also:

Xero Inventory Management Software vs TradeGecko Inventory Software
15 inventory management techniques that will trasnsform your business
How to calculate inventory ratios and KPIs: 5 easy formulas to start using now

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