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Inventory Management: 10 Fields that can Build or Break Your Business

Inventory Management: 10 Fields that can Build or Break Your Business 

Inventory generally signifies a large portion of your assets, if not the biggest. If your business handles any inventory, then your Inventory Management system’s abilities can efficiently make or break your business. In a retail environment, a company must purchase, store, and then sell items to customers. You may never lay hands on the products due to handling or drop shipping in a distribution company. Your inventory may only be made up of the items you purchase as raw materials in a manufacturing environment.

Minimizing investment in inventory while maximizing profit is a goal for any competitive industry, such as retail. So, suppose your bottom line is based on measured inventory costs. In that case, inventory management could dramatically influence where your company really is financially versus the numbers you might be measuring for your inventory stages.  Below are 10 strategies to excellent inventory management that would improve your business to mature or remain productive.  

#1: What is the Price of Your Inventory Right Now?  

To have access to the price of your inventory at any point gives your business the capability to efficiently plan and assess your financial position. In some cases, a business’ setup can regularly settle the inventory value; otherwise, a physical count is necessary for complete accuracy. Although the cost of your inventory is the foundation of profitability for your company.  

Obviously, there are dozens of business-operating expenses, but knowing your inventory value is crucial for determining your pricing and profitability. Without an Inventory Management System, your best bet would be to study your inventory account balance. However, this option’s problem is that it may not accurately reflect inventory items but aren’t recorded in the books yet. For example,  you may have acquired or sold items that have not been invoiced and, therefore, not previously registered. What is required is an Inventory Management system that provides you with inventory costing method options, such as LIFO, FIFO, weighted cost, and standard cost. Depending on which cost method you use will directly impact your balance sheet, income statement, and cash flow differently. It is essential to tell what they are.  

#2: What Valuation Method are You Using?  

It is important to understand your valuation method because it can impact profit margins and your income statement based on which method you are using. The valuation methods available, for example, are First in First Out (FIFO), Last in First Out (LIFO), Weighted Average, and Standard Cost.  

FIFO is an approach in which inventory tracking and costs assume the first items purchased are the first items sold. This matches inventory flow, similar to what you would expect in a retail establishment. New items would be placed behind the existing items on a shelf, so, in theory, the oldest items would be the next sold. Of course, even if the actual inventory flow does not match this, the cost and valuation will follow this pattern. As a result, prices recorded on sales will be based on the oldest and most likely lowest items. The current valuation will always be found on the value of the most recent costs. In this case, the result is that the items’ prices will be lower, and the result is higher recorded profit and taxes.  

LIFO is an approach in which the tracking of inventory and costs assumes that the last items purchased are the first items sold. This flow would be less common in practice because it would be as if a business always purchased the newest items on the front of a shelf. The items on the back of the shelf could be much older. Regardless, the costs of items sold will be based on the most recent items purchased. The value of inventory will be based on the oldest items. In this case, the outcome is that the items’ cost will be higher and lower recorded profit and lower taxes.  

Average cost creates an average based on the price of all inventory items. It takes the approach that the current cost most accurately reflects all items’ costs by using an average cost. This method is most effective with a computer system that can track and update expenses as soon as items are received. This method will impact the resulting profitability and inventory valuation. Still, the results will vary depending on whether items increased costs over time, by how frequently the items were purchased, and so forth.  

Standard cost uses a fixed cost entered manually for an item. Any variation with the actual cost is recorded in a variance account. This method’s advantage is that the user has more control over the costing being used. It can prevent valuation changes that are not wanted or don’t match the business environment. However, in many businesses, the inability to efficiently update the cost for items could easily make this method useless.  

Overall any business may have good reason to use any of the valuation methods described above to meet the needs and objectives or requirements of their business. The main point to remember is that the technique used can impact your profits and inventory value. Having a good management system is essential to effectively understand how these impact your accounting to make intelligent business decisions based on reality, not based on variance resulting from valuation methods.

#3: Where is Your Cash?  

Inventory is a liquid asset that heavily influences cash balances. Most businesses are careful about monitoring their cash and keeping track of how much they have. However, businesses that simply rely on their balance statements from the bank to assess their cash flow put themselves at risk if they carry large amounts of inventory. For example, you may know your assets’ value in stock, but do you know how much of it you have paid in full? Do you know how many customers have been sold items from inventory that have not yet paid you? The answers to these questions can dramatically impact your cash situation and your bank statements.  

A bank statement might show that you are selling, and from all appearances, your business is healthy. However, when bills come due, you might find all your cash tied up in inventory; a large number of profitable companies end up going out of business due to this. With an adequate Inventory Management System, you can establish the necessary tracking and controls you need to avoid this from happening.  

One solution is to integrate a purchase order process that tracks any inventory purchase order as soon as it is authorized. Use this information to evaluate how much cash you’ll need to pay for the purchases when they come due. Besides, you can better track when items are received and placed in inventory. Although you may not get an invoice until all items are accepted, you can record their value based on the order as they come in.

A good inventory tracking system can immediately and accurately reflect sales to see what revenue you generate and the items sold. Also, this information can be reviewed to estimate when you can expect to receive payment.  

Similarly, suppose a business has a more significant amount of cash-on-hand. In that case, they could cover bills and remain in business, even if the revenue didn’t come in on time, regardless of having the ability to track your inventory sales revenue. Payment for the inventory or what you may pay out in inventory is critical in determining your business’ actual cash balance.

#4: What is Your Profit Margin?  

You may know your business’s profit, but at what level of detail can you break down where this profit comes from? If your company bases profit mostly against the cost of inventory, the ability to track and know your inventory’s value becomes critical. Also, it’s difficult for any business with more than a handful of inventory items flowing through their business or being used for raw materials to see where your profit margin comes from.  

A useful sales profit report makes it possible to study your business virtually. See precisely where your profit is coming from and evaluate how profit margin percent translates to actual profit. For example, how much actual cash does an item with a 40% profit margin bring in compared to another item currently making 20%?  

Also, a report that allows you to break down profit by: department, customer,  customer type, product type, vendor, location, salesperson, and many other options is essential in whatever way you need to see it. Having the ability to drill down to where your profit margin is coming from helps you evaluate what areas to focus on. Look for ways to improve profit or track how changes in your business are resulting in net profits.

#5: Do You Know How Turnover Can Change Your Profit Margin?   

Imagine you have two existing products, product A and product B. You need to drop one of them to make room for new product C. The decision would be based on which current product was generating the most revenue. However, what if product A was causing a gross margin of 40% but product B only 20%, which product would you drop? Product B, right?  

If you decide just based on the gross profit alone, you may be dropping the more profitable product. The rate of turnover can change the scenario. Even at a  lower profit margin, product B may be a much more profitable product if the turnover is higher than product A. For example, if both products retail at $100, then each time product A is sold, you have made $40 of gross profit, and each time product B is sold, you earn $20 of gross profit. In a single month, if 2 of product B are sold and only one of product A then they each have generated $40. However, suppose three or more product B is sold for every product A. In that case, product B generates more money and a better profit or revenue for your business. It should be kept despite product A’s higher profit margin.  

The size and space a product takes up is also a factor. If you have limited space, you may determine to keep product B only because it takes up less floor space. However, product A may be a more profitable product, but it takes more room. This is often evaluated in detail by looking at the gross margin per square foot of retail space. Comprehensive reports can provide the information you need to assess your items’ actual profit and cost. To help provide more useful and accurate information that allows you to make the best business decisions. Profit-margin reports that can reference the gross margin with the dollars generated. It can help avoid overlooking low margin products that produce a high dollar amount due to turnover

#6: Do Changing Costs Go Unnoticed?  

The details of how costing changes affect your business may vary widely. Still, if inventory is a large part of your business, these changes will have an impact. The simplified bottom line is that the company’s selling price should be high enough to cover all costs and produce a profit. As a  result, any changes to the cost structure can impact profit. In the case of inventory, this profit will change whenever the cost of an inventory item varies. In many cases, the sale price may be set up to absorb any changes in value. Still, suppose costs change and sale pricing isn’t updated soon enough. In that case, you may be missing out on potential profits or even losing money.  

If the sale price is a margin of your items’ cost, a good inventory management system will automatically adjust the sale price. You can always be assured that you are getting the profit you want when an item is sold. However, it is not practical to have the sale price shift freely at the cost of a product. When cost shiftings are common but don’t indicate an overall increase in costs that require a price increase. Alternatively, in a cost-sensitive market or business, a change in the sale price may have a dramatic impact on sales. So management may need to consider any pricing changes carefully.  

In this case, it would be possible for a cost to increase and to have items sold. Before the change is noticed, or before management has the opportunity to review the pricing and adjust it accordingly. Do you know if your costs have increased? Or how the inventory costs might be impacting sales prices and profit margin? If not, you may want to consider investing in a more robust Inventory  Management system.  

If that’s the case, you would want a purchase order module comparing the cost of items received with the items already in inventory. A report shows the change and shows the impact on your sale price and profit margin should be issued if the price changes. This helps make sure inventory costs are addressed immediately, if needed, to avoid any loss in profit.

#7: How Sophisticated is Your Pricing?  

Having the ability to set up and automate pricing can be priceless. It may only be possible if Inventory Management is used. In fact, without a good Inventory  Management system integrated to your point of sale or order entry, it is likely that the sheer logistics of communicating and managing complex pricing limit your options.  

A good Inventory Management system can accurately track the cost of the items you are selling or using as raw materials. Make it possible to set promotional prices temporarily for a sale or some other campaign. You can also have the system identify your customers and automatically adjust pricing accordingly. This is useful for businesses with wholesale and retail pricing or contracts. A particular customer is allowed to set pricing based on a deal.  

What you should look for is software that provides numerous pricing structures and methods with the ability to maximize your profit without involving salespeople or clerks. This saves you time, labor, and errors because all pricing changes are made behind the scenes without mistakes. All the clerks need do is enter the item in the register.  

In the end, a powerfully built system makes it possible to see the result of your pricing methods, evaluate their success, and improve pricing to maximize earnings.  

What pricing structure do you have in place? Are you leaving profit on the table? Are you restricted by your ability to incorporate more complex pricing efficiently?

#8: Can You Identify Trends?  

No matter what business you are in, there will be some fluctuation in sales and, as a  result, the movement of items in your inventory. In some businesses, these changes can be fast and furious, and in some, it may be a slow process over the years. Regardless, how do you identify trends and differentiate them from long term changes in sale patterns?  

A failure to effectively track trends can end up overstocking items that never move or require heavy discounting in some situations. You may lose business to competitors or spend high costs to get the items needed to meet demand in another scenario. Any company that can point out the trends early can have the higher ground. Take advantage of these trends by giving out in-demand items and discarding those that no longer interest them. With the “big box” stores, it is often critical that a smaller store do a better job managing customer tastes and needs to stay competitive when pricing is not an option.  

So how do you accomplish this? How do you identify sales trends in a timely and useful manner? A tightly-integrated software with purchase order, sales, and inventory modules can track inventory movement details from receiving to the sale in detail. Produce a report that provides detailed information about the direction of your inventory items over 12 months.

#9: Can You Automate Ordering?  

If your business has a lot of inventory, regularly ordering and purchasing those items must be addressed. To do this effectively, one needs a  purchaser who can spend time analyzing sales, monitoring inventory levels, and making orders to keep items in stock for customers. While any business’s specific needs vary widely, inventory management can likely be dramatically improved with computer-assisted ordering.  

Overall the key to this is the ability to take advantage of an integrated system that makes it possible to streamline purchasing by automating it. This not only frees up time to focus on other aspects of your business, but it prevents errors and the potential for overlooking needs. It automatically generates orders based on the actual Inventory levels.  

So how much time could you save by automating your orders? How many times have customer’s needs gone unfilled because stock on some items was low? Look for an excellent integrated Inventory Management system that can make all these problems go away and give you a competitive advantage by streamlining your order process.  

There are systems where purchase order, sales, and inventory are integrated and work seamlessly together — strategies that can set up minimum and maximum quantities for an item. When that item runs low, the system automatically generates an order based on those numbers and current inventory levels. There are even good systems that can generate orders based on ‘the least expensive vendor.’ To get the best deal possible for your needs and business, you can establish other criteria.

While there may always be a need for careful ordering and review, an option to automate the ordering and fulfillment of the staple items is beneficial. It frees up your time so that you can focus on the areas in inventory and purchasing that require greater attention.

#10: Do You Know Where Your Vendors Are?  

Who are your vendors? How many vendors have you purchased your inventory items from? Are they late delivering orders? If so, how often? Do quoted prices differ from prices listed on an invoice? These are all questions you may have about your vendors. Based on your business and business needs—delivery timeliness,  availability of items, and service—may vary in importance. For example, you may be more interested in a timely and quick supply of items or want the lowest price. You can handle late shipments or poor service, or you may be somewhere in the middle, or you may have some items you need shipped on time and others you don’t.  

Managing your vendors and tracking what they provide and how they meet your needs is critical to your business. In many industries cultivating good relationships with vendors often provides a competitive advantage that can make your business excel. With an excellent integrated system, you can collect and gather the information you need to make the right decisions about your vendors. With a complete, integrated Inventory Management system, you can provide your Vendor information to help them better serve you. 

The Software Solution  

Proper management of your business’ inventory starts and ends with a customizable, robust, fully-integrated software setup where output reports information you need to see daily. 

Unlike software that merely interfaces, our programs are truly integrated. A change made in one aspect of the system (a sold item, for example) is automatically reflected in every other system’s other facet. You never have to enter the same information twice and always know your business’ numbers are up-to-the-second and accurate.  

We have a myriad of tools and features that comes with each of our packages. It’s the amount of information available in our reports (and the fact that they are customizable) that has been the subject of praise from our customers since the beginning. We provide multiple report options from within the inventory, sales, and purchase order modules. Since we are tightly integrated, business owners and managers can track details about Inventory movement from receiving to the sale.

About the Author: AJ Amjad Khanmohamed

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