Inventory Management 101: a guide for retailers
If you’re a business owner, keeping the right amount of inventory on hand is one of the top ten things you can do to boost your profit margins and customer satisfaction. By reducing your costs and improving your ability to meet demand, effective inventory management can increase your cash flow and free up your working capital, so you can invest in other parts of your business. And the effect is significant: improving your inventory management by 15% can add over 30% to your bottom line.
In this post, we’ll talk you through why inventory management is so important, and how you can do it better.
How inventory management will reduce your costs
Small businesses are often tempted to place large orders with their suppliers in order to qualify for bulk discounts. Big orders can also give you the power to negotiate better shipping rates or payment terms. On the surface, it looks like an easy way to save on your expenditure.
But the cost of purchasing your stock isn’t the only cost of inventory. The more inventory you hold, the more space you’ll need to store it, whether that’s in a warehouse or in your retail store. You’ll also have to insure the inventory against theft or damage. If you’ve got multiple stores, there’s a cost associated with reallocating your stock from store to store. And if your inventory isn’t selling well, you’ll have to discount it, or maybe even write it off entirely, e.g. for perishable items that spoil, or out-of-season fashion.
If you’re holding more inventory than you need, these costs can be high enough to negate the effect of those discounts that attracted you to the bulk purchase in the first place. So it’s important to make sure you’re only buying the inventory you need.
How inventory management improves customer satisfaction
On the flip side, it’s equally important to make sure you’re buying enough inventory to meet customer demand. If a customer comes into the store wanting a particular item that’s out of stock, you not only risk losing that sale, but losing the customer altogether.
More than 80% of shoppers want to check nearby product availability online before they visit a store, and nothing’s more disappointing than getting there and discovering the item isn’t actually in stock. The same applies to online stores: customers place online orders with the expectation that the items are in stock and ready to be delivered, unless you tell them otherwise. Effective inventory management helps avoid this situation, making it easy for you to know when you need more stock.
It’s increasingly common for retailers with a multi-channel sales strategy to fulfil online sales from their in-store stock, effectively combining all stores’ inventory into a single virtual warehouse. This is an effective way to make better use of your floor stock, but it can only work if you’ve got a clear picture of how much you’re holding, and where.
How inventory management frees up cash
Inventory that you’re holding is an asset (in the accounting sense), much the same as your computer or car. It has a dollar value, but you can’t use it to pay your bills or buy that new POS system you’ve been thinking about. You have to convert it into cash—by selling it—if you want to do that.
If you buy smaller quantities of inventory more often, you’re keeping more cash on hand instead of tying it up in stock. This is important for small businesses and startups, which are more vulnerable to fluctuating cash flow. And if you’ve been tracking your inventory well, and have a good idea of what’s not selling, you’ll be able to discount it early, recovering that cash sooner and (hopefully!) avoiding a write-off.
How to manage your inventory
With 40% of small business failures in Australia attributed to cash flow problems and a further 33% caused by trading losses, it’s impossible to ignore the importance of an inventory management strategy. But where do you start?
First, you need information—knowing where your stock is, when, and who is buying it. Understanding your sales trends will help you avoid the unnecessary costs of holding too much inventory or missing out on a sale you should’ve been able to complete. Some products are popular at certain times of the year or month, so it’s important to have a system that lets you track your inventory movement and forecast demand.
Then you’ll want to speed up how quickly you can act on that information. If you’re manually counting stock and placing orders, and that process takes you two weeks, and then it takes another six weeks for your supplier to deliver, you’ll need to buy enough inventory to last you eight weeks at a time. But if you’ve got an all-in-one retail system that combines your inventory management with your sales and ordering systems, you’ll be able to monitor stock levels in real time and place orders as soon as you get low. Cutting your eight week inventory cycle down to six weeks means you’ll have 25% less cash locked up.
Finally, you’ll want your inventory data to be accessible everywhere, backed up and secure, so you’ll always know the value of your stock on hand, no matter where you are or what’s going on.
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