Supply and Demand
For centuries many business owners thought of inventory as supply and demand. While this may have been true in the old days, there are other things to consider, like inventory on hand and days supply of inventory. Having too much or too little inventory and even obsolete inventory can eat up your cash fast. Before you base your inventory on supply and demand, let’s look at how inventory control should work.
Good Inventory Control
No business owner wants to have too much inventory or too little. But where is the happy medium and one that won't hurt your pocketbook? Some business owners use the scientific method of days supply inventory, or the number of times you order inventory per year, divided by the number of days in the year will equal your days supply of inventory. No retailer should ever be over a thirty days supply of inventory using this calculation. Not all small business owners can determine this calculation especially if its a new business. Here are some easy ways to practice good inventory control:
Develop a purchasing plan – If you are in the retail business and expect to sell so many units per month, calculate how much those units will cost you per month. For example , if you plan to sell 30 units per month and the annual cost of those 30 units per month is $10,000, should you only order $10,000 worth of inventory? The answer here is no. You should have at least a 30 days over supply of inventory so it's better to order more than you need unless you are in the food business. Food businesses need to determine how the restaurant business works regarding food on hand versus food sold versus items on the menu.
Fast-moving inventory – All retailers will have fast-moving inventory or favorite items that sell fast. Should you include this in your initial purchasing plan? You can answer this by the type of business you have. If you are a pizza shop and you will sell mostly pizzas, you will probably need to allow for more pizza crusts in your inventory than rolls for sandwiches. Consider your fast-moving items as their own inventory but do include them in restocking. When you do restock, find ways to volume shop to save dollars.
Restocking inventory – It's hard for any new business owner to determine when to restock. It may take a little history behind you to get a good idea of when to restock. To help you make decisions on restocking, you must have a system in place that tells you when to reorder. The simplest of inventory control systems is the visibility count or the stub control method. In both of these, a manual inventory count is done on a regular basis or a stub count of items sold helps to determine what was sold and when to reorder. A better idea is to invest in a point of sale terminal which will give you a report on each item sold where you can use that report to help you make smart restocking decisions.
Manage Your Inventory
What is the best way to manage your inventory? The Small Business Association suggest these tips:
At Delivery – Check to make sure everything you ordered is correct. Check for any damage to inventory. If you find damage, notify your supplier immediately and have a plan in place with your supplier on how to return damage inventory.
Stock Inventory – You won’t be able to keep track of your inventory if you don’t stock it and report it to your inventory system. Whether you use a hand inventory system, utilize an inventory system in your accounting program, or have a separate inventory software system, you must stock in your inventory in order to track it and sell it.
Don’t Over-order – If you’re a new business owner, be smart and only order what you expect to sell in a certain inventory period. You an always analyze daily if you’re going to run out of inventory and then reorder. Once you have a few months under your belt, you can use that history to determine what you’ll need to order.
Inventory = Cash – If you spend too much on inventory, your cash will be depleted fast. Find out if old or obsolete items can be returned. If not, find a way to sell them fast. Some smaller retailers utilize places like eBay to make some money on obsolete inventory or hold sales specials. You can also check with retailers similar to you to see if they can take some of that old inventory off your hands.
Inventory Software – There are many types of inventory software systems on the market today. If you utilize an accounting system like Quickbooks, you should learn how to use their inventory system. If you rely on outside sources for your accounting, it’s best to invest in an inventory purchasing software system that can analyze your inventory and let you know when it’s time to reorder of if you are overstocked. Almost all of these inventory software systems will walk you through your inventory and set up controls based on your type of business. Because inventory sitting on the shelves means less cash in your pocket, it’s worth it to invest in inventory control software system. Ask to see demos of systems and only purchase the one that meets you needs. Don’t be talked into a system that is over your head or one that is larger than your business requires. If a inventory software system is in modules, only purchase the modules you need.
For more information on how to control, set up, and manage your inventory, visit the Small Business Administration and read their Inventory Management article. You can also visit your Small Business Development Center and get assistance on how to set up your inventory.
As a business owner, you need to know how to control your inventory so it doesn’t break your bank account. Use these tips on Inventory control to help keep your inventory where it should be as far as affordability and moveability.