In this podcast, SCORE mentors talk with Jami Schwartz and Allison Boswell of Kabbage on how to manage your small business's cash flow and inventory.
The phrase inventory management may strike terror through your very being. Perhaps it brings back nightmares from your high-school cashier job “back in the day,” when you had to spend hours counting endless rows of cereal boxes or racks of women’s jeans by hand. But now, as a small business owner, you have likely realized inventory control is absolutely necessary if you intend to run an efficient business and make money in the process.
Are you handling inventory in the best way possible?
In today’s competitive marketplace, you can’t afford to lose money anywhere within your business operations. And if you’re one of the 43 percent of small business owners who still count inventory by hand and hand-write or key in data, then those inventory nightmares could become all too real when human error becomes the norm.
Avoid loss through an automated inventory management system
When you transition from manual inventory management into an automated barcode system, you save time and money on many different levels, which include:
If you handle items with expiration dates, like food or even cosmetics, they can become rotten or unusable if not sold in time. And spoiled products mean your investments go down the drain, along with your potential profits. For example, the U.S. spends more than $218 billion growing, processing, transporting, and disposing of food that's never eaten. Researchers estimate there is $1.9 billion of annual business profit potential from the revenue and cost savings of implementing various recycling and food waste prevention strategies. So you could say a solid inventory management system can be your front line of defense against spoilage. You’ll have access to real-time data to know the lifecycle of your stock, and your warehouse workers can organize items to ensure older products get sold first.
An expiration date isn’t the only way your products “go bad.” Deadstock is items that can’t be sold for a number of other reasons: they’ve gone out of style, out of season, or the products become otherwise irrelevant. Often an item is declared “dead” after sitting on a shelf for 12 months. Again, an efficient inventory management system will provide the knowledge you need to order the right amount of these particular items. Sales reports can aid in recognizing if an item is dead weight before you buy it. These reports are useful for distributors and small businesses looking to buy new products.
3. Storage Costs
Warehousing expenses fluctuate, based on how much you store during a given season. When your store has too many products at once or ends up with a product that’s difficult to sell, your storage costs will go up. An inventory management system can help forecast what items sell and what doesn’t, as well as how many are sold. This accurate forecasting helps you make more informed purchasing decisions, avoiding high storage costs and saving your business money.
Inventory management improves cash flow
By avoiding the aforementioned costs, you’ll be pleased with the money you’ll save over time. But, inventory management can also increase cash flow. You’ve already paid for the inventory you currently have in your warehouse, and the hope is to sell those items and make a profit. After all, you’ve got bills to pay, and it suffices to say your landlord wouldn’t be impressed if you paid him with 500 t-shirts.
That’s why you need to factor inventory management into your cash flow management. It affects sales because it will tell you how much you have on hand and how much you should sell. In addition, it impacts expenses, with real-time reports about what you need to purchase. Both of these primary factors play into how much cash you have on hand. And going forward, an inventory management system helps you plan ahead to ensure you buy proper amounts of products and that you have enough cash set aside.
The following are do-able inventory management solutions to ensure your small business keeps revenue flowing:
1. Par Levels
Par levels are the minimum amount of products that should be on your warehouse shelves at all times. When your inventory level drops below these predetermined levels, you know it’s time to order more. These levels are based on how fast items sell and how long it takes to get it them back in stock. And keep in mind that conditions change, so check your par levels regularly to make sure they still make sense and make adjustments if needed.
2. First-In-First-Out (FIFO)
This is a very important principle in inventory management. It means exactly how it sounds. The stock you get in first (first-in) should be sold first (first-out), not your newest stock. This concept is especially critical for perishable products to avoid spoilage. However, FIFO is also a good idea for nonperishables. If something is always getting pushed to the back of the shelf, it could simply become worn out, eventually go out of style, or expire.
Inventory management isn’t only about technology or in-stock products on the shelves. It’s also about the people along the supply chain. From quick returns of slow-selling items to restocking popular products or manufacturing issues…it’s important to maintain good working relationships with suppliers. That relationship could come in handy someday when you have a problem to solve…and make the process so much smoother.
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Funded, in part, through a Cooperative Agreement with the U.S. Small Business Administration. All opinions, and/or recommendations expressed herein are those of the author(s) and do not necessarily reflect the views of the SBA.