INVENTORY MANAGEMENT | 4 minute read
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.
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:
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).
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.
This means expenses incurred in relation to purchasing and holding inventory could be unnecessarily high.
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.
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.
This results in time-consuming (and boring) double entry of data and the increased possibility of human error.
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.
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.
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:
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
