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Simply put, inventory management refers to the act or process of keeping track of or managing the stock in your small business. It is a crucial aspect of running a profitable business because the inventory you keep is essentially potential profit in the form material goods such as food, clothes, etc. Holding on to inventory should therefore be something to avoid as it will tie up your cash flow.
Ultimately, inventory management helps you do two things:
- Save money: Inventory management can help you save money by ensuring you avoid spoilage (for items with expiration dates), avoid dead stock (stock that cannot be sold because it is outdated or irrelevant), and save on storage costs.
- Improve cash flow: While inventory is potential cash, this money is inaccessible and unusable until the inventory is sold. It is therefore important to factor inventory into your cash flow management as it has an impact on both your sales and expenses. Accounting for your inventory will improve your cash flow management.
There are multiple inventory management systems available for small businesses, ranging from simple Excel spreadsheets (or Google sheets) to more elaborate inventory management software. The choice of system is up to you and your businesses needs. Regardless of the system you choose, here are eight tips for managing your inventory.
1. Set minimum or base inventory levels
Also known as "par levels", it is important to establish minimum levels at which your inventory should be at all times. When the inventory dips below these predetermined minimum levels, you can order more stock. Deciding on the right par levels might take effort, but once they've been established, they will allow you to automate and simplify the ordering process.
Don't be afraid to increase or decrease your levels over time, based on your business's needs or the demand for your product(s).
2. Follow the principle of FIFO (First-In-First-Out)
The principle of FIFO, when applied to inventory, means that the oldest stock you have (first in) should be sold first (first out). This is especially important when your stock is perishable to avoid spoilage, but should also be applied to non-perishable stock to avoid dead stock. Ensuring your stock room or warehouse is organised will help you stick to this rule.
3. Manage your relationships with your suppliers
There may come a time when you need to return slow-moving stock or place an unexpected immediate order for popular stock that is selling quickly, for example. In those instances, it would be helpful to have a good relationship with your suppliers so they are more willing to help you when needed. Good communication is key to managing these relationships.
4. Make regular contingency plans
Although inventory management has its obvious benefits, it can also come with a number of issues that may damage businesses without adequate contingency plans in place. Examples of potential issues include:
- An unexpected sales spike causing you to oversell your stock;
- A cash flow shortfall which prevents you from being able to purchase more stock;
- A lack of storage space for stock purchased during seasonal sales spikes;
- A miscalculation of inventory leaving you with too little stock;
- Dead or slow-selling stock taking up storage space;
- A manufacturer being unable to supply the stock you ordered; and
- A manufacturer unexpectedly discontinuing a product you order.
The best way to deal with the issues above is to ensure you have appropriate contingency plans that outline how you will resolve each issue and what impact they may have on the various functions in your business.
5. Ensure regular audits are carried out
As mentioned earlier in this article, keeping track of your stock is necessary, whether you rely on inventory management software or take stock manually. There are three main ways to audit your stock:
- Physical or manual inventory: This is also known as stock take and often takes place at the end of the business year.
- Spot checking: Relying on an annual physical inventory may not be the most effective way to spot problems that occur throughout the year. Doing random spot checks can help you solve this problem.
- Cycle counting: This refers to the process of counting inventory on a more regular basis - each day, week, or month - than physical inventory. However, rather than counting each product, you count a different product on a rotating schedule or cycle.
6. Prioritise your products using an ABC analysis
An ABC analysis refers to a method of organising or prioritising your stock based on three categories:
- A - high-value products with low-frequency sales
- B - moderate-value products with moderate-sales
- C - low-value products with high-value sales
You then prioritise how you manage and sell your products based on this analysis. For example, because category A products are harder to sell but have a larger financial impact, they should a top priority.
7. Create accurate predictions
Accurately predicting future demand for your products is a difficult skill to master but will help you determine how much stock to order and when. Taking the following into account will help you make more accurate sales predictions:
- Market trends
- The previous year's sales
- This year's growth rate
- Guaranteed sales
- Seasonality and the economy
- Future promotions
- Planned ad spend
Not all of these factors may be applicable to your business - you may even have additional factors to consider that don't appear on the list. The point is to use whatever relevant information you have at your disposal to make these predictions.
8. Consider dropshipping
Depending on the size and scale of your business, you may not have the space or finances to store and manage inventory. Dropshipping solves this problem by removing the need for inventory management. This is because the manufacturer or wholesaler carries and ships products for you - either themselves or through a third party - rather than you doing it yourself. That being said, dropshipping is often more expensive than buying products in bulk.
The content in this article was sourced from Shopify.
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