Managing Your Inventory
To be successful, you need products on hand for customers to purchase. To be profitable, efficient inventory control is essential. Inventory management needs to be treated as a critical part of your everyday business endeavors.
Types of Inventory
Inventory is your product stock, goods you sell, and any materials needed to run your business. Depending on your type of business, there are different types of inventory.
Raw materials are typically commodities such as minerals, chemicals, steel, wood, or basic food items used to create components or finished products. They may also be already assembled things purchased from external suppliers and goods that are only partially finished.
Materials and parts that are waiting for you to transform them into something else, and partially assembled items to be made into a finished product. Also, finished goods not yet packaged.
Items that are ready to be shipped or sold to customers, which can include retailers or wholesalers.
Other Types of Inventory
Inventory includes items for maintenance and repair, and those needed to stay in operation.
- Transit inventory—products moved from the warehouse to the factory.
- Buffer inventory—items kept on hand to not run out because of poor quality or slow delivery.
- Anticipation inventory—extra components, material, or goods kept at hand to meet seasonal fluctuations in demand.
To make a profit, you must include all inventory costs with other operational costs, balancing all of them against your product price
- Purchase costs.The most basic cost. For a retailer, buying finished products. For some factories, buying parts to assemble. For other companies, buying raw materials to produce products.
- Processing costs.The cost of assembling or processing materials bought from outside companies, including labor and utility costs for the work area.
- Distribution costs.Shipping products to market.
- Inventory holding costs.Storing inventory, including items like rent, operational costs for space, and insurance.
- Shrinkage costs.Anything that makes a product not salable—poor quality, theft, or spoilage.
Best Practices for Managing Inventory
The better you closely manage inventory, the more efficient and profitable your company can become.
Don’t keep too much in stock.
Too much inventory on hand ties up cash in its purchase and adds storage. Idle inventory can also become obsolete or get damaged.
Track your inventory accurately.
Maintain good records as inventory moves through your business. Take into consideration unusable inventory due to damage or poor quality. Monitor pilferage and other forms of shrinkage.
Use reliable software to track inventory.
Quickbooks, Peachtree or another inventory management program are more reliable than an Excel spreadsheet to track what you have on hand, both at an item level and associated dollar value.
Regular inventory monitoring, strong forecasting, and detailed cost tracking will help you manage inventory levels properly. How you manage your inventory can make all the difference in terms of profit margins and competitiveness—and that’s worth your full attention.