One of the principal business strategies for ensuring profitability is inventory management. Let us see the inventory management definition and the best practices for inventory management and cash flow.
Inventory Management – The Concept
Have you ever studied the balance sheet of any business concern, especially in the retail, manufacturing, or the food industry? You will see ‘inventory’ as one of the prime assets of the company. Yes, raw materials, work in process, and finished goods are assets. You sell the finished goods and generate income. Anything that generates income is an asset.
At the same time, inventory is a liability as well, though not in the accounting sense. Does this seem contradictory? No, it should not because inventory does carry the risk of theft, spoilage, damage, etc. This is why you insure your inventory. There are occasions, especially in the food industry where you might have to destroy inventory. This is the main reason why every business should have an effective inventory management strategy in place.
How can inventory management save you money?
There is a very deep relation between cash flow and inventory management. These simple techniques will help you save money.
- Spoilage: The food, pharmaceutical, and cosmetic industries have products that come with an expiry date. Good inventory management ensures that you sell these products well in time to avoid spoilage.
- Dead Stock: The textile, electronics, and furniture industries face this problem of products going out of fashion. This results in dead stock. You need a proper inventory management strategy to overcome this situation.
- Storage: Every business needs to store some inventory. You incur storage and warehousing costs in the bargain. Strategic inventory management can reduce these variable costs and improve your cash flow position.
Inventory management techniques:
Every small business buys inventory for cash. You need to sell them for cash in order to realize your profit. This transition from Cash-Goods-Cash is the cash flow statement meaning. These techniques will help you manage your cash flow better.
- First-In-First-Out: This is the most basic inventory management technique every business should follow. The biggest advantage is that you overcome the issues of spoilage and dead stock effectively in this manner.
- Plan for contingencies: Prepare well for any contingency. Suddenly, you might find a particular item in demand. The stocks might just sell off as quickly as they come in. At the same time, a slow-moving stock can hold up your inventory levels. It can also happen that the manufacturer might discontinue the product. Hence, planning for contingencies is an effective inventory management
- Audit your inventory regularly: Regular stock audits can help you control the inventory position. You get an idea about the slow-moving or obsolete stocks. Disposing of them becomes easy when you are able to identify them on time. Regular audits thus help in inventory management.
- Forecast accurately: You will be able to do this if you have a thorough understanding of the market trends. This requires you to analyse your inventory position and the overall demand-supply situation in the market. If you are able to predict the demand well, you will succeed in maintaining optimum inventory.
- Consider drop shipping: Drop shipping is the new trend today. The success of the eCommerce retailers is ample proof of this variation in managing inventory.This technique virtually removes inventory management from your business portfolio. You need not hold any inventory thereby saving on storage and insurance expenses.
Proper Management of inventory is critical to every business. These techniques will certainly help businesses plan for their contingencies thereby enhancing their profitability.
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