While inventory management is not the attractive, fun-to-talk-about part of running a business, it’s necessary and important. Effective inventory management leads to more profitability, higher customer satisfaction, less waste of materials and better preparation for taxes. (For a tax example, we discussed here how QuickBooks helps users allocate taxes for Cost of Goods, or COGS, as inventory is sold.)
Below are five ways to improve your inventory management procedures. Most are small shifts in your thinking about inventory management, but the end results are big (e.g., greater cash flow in your company).
1. Remember the 80/20 rule.
Most companies make 80% of their sales from 20% of their inventory. This is called Pareto’s Principle, and it’s used for several aspects in business. For inventory management, this principle reminds you to prioritize stock. You should always know the status of the most-sold items for your company.
2. Further categorize your inventory.
Categorizing your inventory helps you and your team prioritize restocking, look for better prices from suppliers and provide your customers with a smooth sales process. Some inventory categories to consider – raw materials, unfinished products, finished products, goods-in-transit, buffer stock and MRO (Maintenance, Repair and Operating) goods. Decision-making is easier with this level of detail in your inventory management tool.
3. Do physical inventory checks consistently.
We strongly encourage using an automated system for inventory tracking. There are usually less errors than with manual counting.
With that said, though, physical inventory checks periodically are necessary to verify the numbers in your automated software. This manual check needs to be done on a consistent basis – every month, once a quarter, twice a year, etc. The consistency with this step is what ensures accuracy in your inventory management tool.
4. Standardize how team members receive inventory and track sales.
This tip is related to the one above concerning manual inventory checks. No automated inventory management tool can overcome sloppy – or untrained – inventory tracking. Thus, creating procedures, teaching them to team members and then overseeing their use are critical to regulating inventory.
5. Keep accurate, informative records.
While working to keep accurate inventory numbers, take the small, but an impactful step of logging other pertinent information like vendor data and price point of materials. It’s this information that allows for better decision-making. For example, if the price of a raw material continues to climb from a particular vendor, yet your team is using less of it, you have the necessary data to determine if a new supplier is warranted or if less shipments are needed of that material.
We understand the importance of inventory management to your bottom line. As an accounting firm with clients from many industries, we’ve helped companies use their inventory management tool in an effective manner – as a strategy to grow their businesses. We’d love to help you as well.