Proper inventory management is key to maintaining a company's positive cash flow and profitability. Make use of these inventory management techniques to help you achieve this goal.
Inventory management is crucial to a business’ operations as it helps to safeguard customer loyalty and increase the company’s profitability. Not having enough inventory in stock can lead to dissatisfied and non-returning customers, whereas being stuck with large amounts of non-selling inventory can result in profitability decline (due to storage costs and obsolescence). In order to alleviate such negative outcomes, it is recommended that following inventory management techniques be incorporated within the company’s operations:
Use ABC analysis
ABC analysis is useful for businesses that sell more one inventory item (product). The objective of this analysis is to ensure that product that is in demand the most is always in stock and available for sale. Being able to sell this product to every customer who desires it can immensely boost the company's profitability whilst improving customer satisfaction. ABC analysis requires that inventory products be labeled into one of three categories: Product A, product B and product C. Product A is labelled as most valuable, product B as having medium consumption value, and product C as the one that is purchased and consumed the least. Annual consumption value of a product is calculated by multiplying its annual demand by its cost per unit. Thereafter, the product with the highest consumption value would be designated as product A, and for this product tight inventory controls would need to be set up.
Reduce inventory shrinkage
inventory shrinkage occurs when actual inventory on hand is less than what is shown in the company’s accounting records. Some major causes of such a variance can be due to employee theft/fraud, shoplifting, clerical error and vendor fraud. Some preventative measures that can help to mitigate inventory shrinkage include:
- Installation of cameras to monitor employee activity
- Segregating the duties of receiving inventory shipment and reporting it in accounting records
- Acquainting employees of the negative repercussions if caught stealing (i.e. risk of job loss, legal action)
- Using software for automated inventory counts.
Be observant of warehouse layout
For a business that receives frequent customers’ orders it is critical to have a designated warehouse employee who oversees the storage and shipment of inventory. It is also recommended that this employee be thoroughly familiar with the warehouse layout. Having such an arrangement in place would efficiently move inventory in and out of the warehouse. For example, an employee well-apprised of the location of specific inventory items, would be able to fulfill customer orders on time and promptly store shipments from suppliers. With routinely being involved in the warehouse processes, this employee can also provide valuable information which can be used as a basis for inventory decision making.
Inventory management software
Depending on the size of the business, the frequency of its inventory turnover and the overall demand for its products, it might be beneficial to integrate an inventory management software (IMS) within the company’s operations. An IMS can help to efficiently manage stock levels which in turn can lead to positive cash flows. Furthermore, IMS can easily generate reports showing which products are selling fast and through which sales channels (if more than one is used).
For professional advice, contact Alpha Accountzy, Accounting & Tax Solutions.
