After payroll expenses, the cost of goods sold is typically a large expense for many businesses, and inventory is often a major asset on the financial statements. Are you confident that your inventory is appropriately managed, and do you have an accurate handle on what you have in stock in any given moment?
It’s important to manage your inventory effectively because your sales activity is dependent on having the right type and amount of products available to your customers, at the right time. By optimizing your inventory levels, you avoid losing sales due to items not being in stock, and you minimize the cost of having too much in stock for lower-demand items. Here are some tips:
If you don’t currently track your sales inventory, implement a system. It all starts with having a way to track your products for sale. According to a 2017 State of Small Business Report, businesses use a variety of methods, ranging from manual processes and excel spreadsheets, to more specialized software. Ideally, you want your inventory management system to integrate with your accounting system so that you have up-to-date financial information to help you understand how your business is doing, so that you can make timely and well-informed decisions. For businesses that already use Intuit’s QuickBooks accounting software, inventory valuations can be tracked in real-time and the financial statements are updated seamlessly for inventory changes.
Whatever system you decide to use, maintain its effectiveness by conducting regular inventory counts of what you have in stock, and reconcile any differences between your physical inventory account and your inventory records on a timely basis. You should understand why these reconciling differences occur and manage the potential risk of theft.
Understand Your Sales Activity to Anticipate Your Inventory Needs. Do you know what your top selling items are? How about your lowest selling items? If not, you should. An effective inventory management process helps you to understand your sales activity and control the number of products you have, so that you have the right amount in inventory to meet the demands of your customers. You want to avoid overstocks for several reasons, such as the risk of theft, damage or obsolescence. Also, if your products aren’t turning over timely, then your cash flow is impacted, since it’s tied up in assets that are sitting on the shelves. So, take a step back from your daily operational duties; look at your monthly, quarterly and annual sale trends, so that you can anticipate what you need – and don’t need – in your stock, at the appropriate times in the year.
Analyze your Gross Profit Margins. Since the cost of goods sold is likely a large expense item on your Profit and Loss Statement, it’s a good idea to review your costs of goods sold each month as a percentage of product sales. If your margin is not where you need it to be, it’s time to take a deeper dive and figure out why it’s not producing the desired results. Perhaps certain product items are causing a significant negative impact and are not worth continuing in your product offerings.
Feeling overwhelmed? Don’t panic. You can start off slowly but surely, by focusing on one part of your inventory first, for example, the inventory coming from one supplier, or your top 10 best-selling products. This way, you can learn what works for your practice and continuously improve as you broaden your scope to other parts of your inventory.
By taking action on these three tips, you’ll be well on your way to better inventory management, leading to better bottom line financial results!
How Consultance Accounting can help: Consultance leverages exceptional talent, proven processes, and top technology platforms to deliver timely & accurate financial solutions that help small and medium-sized organizations improve productivity, increase profitability, and achieve their goals. We use cloud-based technologies that integrate with each other to streamline the process. Contact Us if you have questions and/or need more assistance.