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Here’s Why You Should Follow That Inventory Trail No Matter What

By PRETTY BOOKS ON January 9, 2023
HERE'S WHY is a collection of simple explanations for the things in your business that just don't make sense. There are a lot of moving parts in your business, and not all of them are obvious. Here's Why gets right to the point in identifying what's happening, why, and what you can do to improve your operations. Here's the deal, you need clarity in your finances to make data driven decisions for your company.

Since day one, your CPA has reported your inventory at tax time by taking your year end inventory balance and creating a quick adjustment. These adjustments were good enough for tax filing, and you didn’t need to worry about them for the time being. However, your business is growing and you’re starting to think about scaling. You have a lot of metrics to consider, inventory being one of them. You’re not quite clear on the trends of your inventory purchases and sales. Here’s the deal, you need to track your inventory.

Why? You need to be clear on what you buy, sell, and have on hand.

Inventory is one of the most important parts of your business. Without it, you won’t be able to deliver your products or make money. If it is not well managed, you could even lose money. You need to know what you have on hand and what you’re buying and selling to really be clear about your numbers.

Imagine this. You own a bubble tea truck. You’re in the middle of the day after a huge rush, and you notice that you’re out of boba. You’re contracted to operate for another few hours, but you’re out of stock. When customers come to order, you risk impacting your business by having to turn them away.

Get clear on everything about your inventory. Here are a list inventory questions you should be able to answer:

  • What do I sell?
    • What is the cost of raw materials to make my products?
    • What is the minimum order quantity required by my vendors?
    • What is the margins on the items that I sell?
  • How much do you have in stock?
  • How quickly do you sell out of each inventory item?

Why? You’re not buying inventory based on realistic trends.

It’s common in small businesses to buy whatever you can, whenever you can. Imagine this. You are in retail selling clothing. You found a great deal on a product you sell, so you decide to stock up even though it doesn’t sell as quickly as some other lines in your store. So you buy it to save cost on inventory, but now all your money is tied up on a product line that isn’t selling.

You need to know how quickly each product you sell moves. Inventory is expensive. If you’re not clear on what’s selling, it can impact your business as a whole. Without understanding the trends of your business, you can’t plan ahead. You won’t know when to order things or how much you should buy. Take the example above. On top of holding up your funds, it also takes up valuable storage space in your inventory. Several other lines in your business won’t be able to move and as a result, your business could start to stagnate.

Why? You don’t have an inventory system in place.

Inventory is a large part of the cost of running a business. It’s imperative to track your inventory trail across its journey so you can accurately plan ahead. Since inventory is such a large part of your cost, it’s critical to have a system in place.

Your system doesn’t have to be sophisticated, as long as it meets your budget, resources, and immediate needs. For example, you can manually count your inventory into an excel listing of your ending stock. With systems in place, it reveals the trends and metrics you need in order to make decisions as your business grows. You’ll know exactly what you’re buying, how quickly each product moves, and its impact on your revenue.

From that point, you’ll be able to have the information you need to analyze the averages and patterns of what you see. This process of continuous assessment of your inventory movement is imperative for your business’ success.

Some things to consider

Inventory is expensive and it’s important to track it. It doesn’t matter what system you have in place, whether it’s technology, manual, or both. Here are some things to consider:

  1. Develop a process to count your inventory. Create a weekly, biweekly or monthly process to count all the inventory you have on hand. Include raw ingredients, the units they are sold in, unit price, and how much of each unit you have. It might be helpful to create a map of where things are stored so inventory isn’t overlooked.
  2. Analyze your inventory trends. Ask your bookkeeper to create a report of all the items sold in the past couple of months. Look for trends in items sold the most, least, and not at all. Use this report when you order inventory so you can see what to order and when based on your best sellers.
  3. Scale your inventory system cautiously. If you are investing in a new inventory system, try it out first. Test a couple different systems over the course of a month or two to really get a feel for what it adds to your business. Ask your accountant for recommendations- they will likely have experience with a couple different things and can help you decide what’s best for you.

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The information provided in this post is for general informational and educational purposes only and is not a substitute for professional advice. Consult your financial, business, or tax advisor with respect to matters referenced in this post. Pretty Books assumes no liability for actions taken in reliance upon this information.

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