When a company’s cash is tied up in inventory, it can’t be used in other ways to grow the business, such as hiring, marketing or new equipment. But obviously, a business needs to maintain adequate inventory or risk losing out on sales. Inventory management, like so many aspects of running a business, is a balancing act. Owners with good control of inventory offer the right selection of products and the right service to customers without having to tie up too much cash.
Of course, a company’s inventory days can fluctuate widely depending on the industry. Overall, privately held U.S. companies so far this year are, on average, taking longer to go from raw material purchases to sold finished goods than in recent years, according to preliminary estimates from Sageworks, a financial information company. The average number of inventory days is nearly 85 year to date, compared with roughly 81 to 82 days in each of the previous two years, according to Sageworks. Restaurants and other eating places using fresh food and other products with short shelf lives have an average of 13 inventory days, while clothing stores’ average is at the other extreme, at about 177 days,
Inventory days often increase when sales are growing, so it’s a good idea to benchmark your business periodically and take steps to improve your inventory management. Here are six ways to tighten inventory control:
6 Tips to Improve Inventory Management
Start with an inventory
A physical count of your inventory will give you the accurate information you need to better manage your business. Knowing exactly what you have in raw materials, work in progress and finished goods (and how those figures compare with what you thought you had based on company records) is the best starting point for identifying improvements at each stage. For example, you may find shrink, or the loss of inventory between the time of purchase and the time it is sold, is an issue requiring immediate attention through more careful checking of invoices. If you’ve never conducted a formal inventory, check out some resources for step-by-step plans and make the process as simple or as complicated as you desire. You can always fine-tune the process the next time.
Identify what’s moving and what’s not
One of the first ways to use your inventory information is to examine by product what is moving and what isn’t. Doing this on an ongoing basis will help identify products that may need to be discounted in order to replace them with faster selling items or in order to generate some cash. Studying your inventory, along with your sales patterns, should help you see trends in the sale of high-margin vs. low-margin items. You may also discover overlapping product lines that aren’t productive.
Evaluate who orders what when
It’s important to provide controls over ordering. The benefit of e-commerce is that it makes it easier for your workers to get what they need; but it also makes it easy to over order. Review your systems and processes for inventory order points to make sure that you can order quickly when needed but are avoiding over-ordering.
Ask your accountant
Accountants can often provide experience-based advice on how to improve internal controls and how to use your bookkeeping system to better assess and manage inventory. Ask what other clients in your industry or in other industries are doing that’s successful. Seek advice on whether your inventory-forecasting system, whether it’s an Excel spreadsheet or a more sophisticated tool, is the best system for your needs.
Balance bulk-purchase benefits and costs
Some business owners may be lured by bulk-purchase discounts into acquiring more inventory than they need. In some cases, however, inventory acquired through bulk purchases ties up cash and takes up retail, warehouse or manufacturing space that could be used for a higher return. Don’t forget to take into account these costs, as well as longer term costs tied to inventory obsolescence, spoilage or shrink when considering bulk-purchase discounts.
Evaluate supplier options
In today’s economic environment, alternative suppliers may be eager to earn your business, so explore options. Even if you remain with your current suppliers, knowing what’s out there in terms of pricing and delivery capabilities may provide you with negotiating power as you work with existing suppliers.
Cash is the lifeblood of any business, so taking the time to evaluate your current inventory and to look for ways to manage it better can keep your business healthy.
By Mary Ellen Biery, Research Specialist, Sageworks
Sageworks, a financial information company, collects and analyzes data on the performance of privately held companies and provides industry benchmarking data.