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As we start the new year, many businesses will generate their fourth-quarter financial statements and look back on the entire year’s financials. And what a year it’s been! The COVID-19 pandemic and resulting economic fallout have likely affected your sales and expenses, and you’ve probably noticed the impact on both. However, do not underestimate the importance of inventory management and its impact on your financial statements.
Carrying too much inventory can reflect poorly on a business as the value of surplus items drops throughout the year. In turn, your financial statements will not look as good as they could if they report a substantial amount of unsold goods.
Taking stock and cutting back on excess inventory reduces interest, insurance, and storage costs. Doing so also improves your ability to detect fraud and theft. Another benefit is that if you conduct inventory checks regularly, your processes should evolve over time — the more efficient your inventory is, the easier it will be to count and control.
As of this writing, the economy appears to be slowly recovering for most, though not all, industries. Every dollar is precious in an environment like this, and any type of waste or redundancy is even more dangerous.
Take a hard look at your approach to inventory management or how you’re managing the services you provide to ensure you’re in step with the times.
Inefficient inventory management is one of the biggest cash drains, and it deprives many businesses of valuable working capital. Excess inventory is cash wasting away in your vault or on your shelves and it is essential for companies to do everything possible to minimize their inventory investment.
If you’re a manufacturer, one of the best ways to do this is by implementing just-in-time (JIT) inventory management. It involves having raw materials delivered just as they are needed, rather than weeks in advance.
Automation plays a significant role in JIT. Back-office inventory and ordering software, combined with bar-code scanners and other software tools are widely available today and can give even smaller companies a leg up on the competition. Bear in mind, however, that JIT systems require greater collaboration with your customers, suppliers, and employees. And they’ll likely bring substantial upfront equipment costs.
Retail businesses should scrutinize inventory and categorize items based on their likelihood of selling. Hard-to-sell items should be marked down and moved out to make room for more popular merchandise.
To keep the rotation of product moving smoothly, retail business owners need the right information at their fingertips. Ensure your sales and order record keeping records are based on sound, safe methodologies.
The right data—laid out in an informative, easy-to-understand way—allows your inventory managers to forecast what you need to order and how many of each item is likely to sell over a stated period. Over time, this should prevent not only running out of hot sellers, but also prevent an abundance of aged items building up on your shelves.
No matter what industry your business is in, the ideal inventory is new, cleanly maintained, and organized in an orderly fashion. If you’re holding a lot of old items, something probably isn’t right, and there are areas for improvement.
Getting the upper hand on inventory is essentially one part of mathematics and another part strategic planning. It is best to have accurate inventory counts as well as inventory controls in place to regulate quality.
If you are struggling in this area, re-evaluate your counting process. One alternative is to employ cycle counting. This process involves taking a weekly or monthly physical count of part of your inventory. These physical counts are then compared against the levels shown on your inventory management system.
With such a large quantity of data, you need the right tools to gather, process, and store it. Investing in a good inventory software system, or upgrading the one you have, is key. As the saying goes, “garbage in, garbage out” and this is true in this case. Imprecise information from your current system could lead to write-offs, inflated costs, missed sales, and lost profits.
As the value of the surplus items drops throughout the year, carrying too much inventory can devastate a budget. In turn, your financial statements simply won’t look as good as they could. It is recommended to take stock and cut back on excess inventory to achieve the following benefits:
These are some of the crucial steps that business owners can take to help run their companies more efficiently and mitigate the financial risks associated with inventory.