Inventory management affects nearly every aspect of your business—but it especially affects your profits and cash flow.
However, a lot of business owners aren't paying as much attention to these operational processes as they should be. There is an opportunity cost of not managing your inventory effectively and streamlining your business operations.
Here are the Inventory Management best practices to optimize warehouse processes, and help you improve cash flow and increase profits...
Inventory Key Performance Indicators (KPIs)
Having an accurate Inventory Management System gives you the data you need for strategic decision-making.
The first step to efficient inventory management is implementing and evaluating your inventory KPIs.
Tracking your inventory KPIs will help you measure the success of the job, and keeps you informed whether you're hitting your goals.
To get started, here are the top 3 KPIs you should focus on:
- Rate of Inventory turnover: Measures how inventory was sold + replaced over time. This will tell you how fast you are selling your inventory
- Sales KPI: Compares stock available vs. stock sold. This will help you determine the optimal level of inventory to carry.
- Days To Sell: Measures the time it takes turn inventory into a sale. This will tell you how quickly your product is moving, and where you should be focusing sales + marketing efforts.
KPIs help monitor your performance and show you where you should be focusing your time. Monitoring these trends will help identify problems before they develop into major issues.
Inventory & Your Business's Cash Flow
Ultimately, the cash flow cycle is dependent on inventory - you spend the cash you have to buy your products, and that inventory turns back into cash when it sells.
Poor inventory management will quickly result in poor cash flow.
Staying on top of inventory helps manage accounts receivable. Trying to move your inventory quickly helps brings more money into the company much faster.
One recommended method of properly accounting for inventory is the ABC Analysis Method - a method for categorizing inventory by hierarchy of most important to least important products. For example:
– A: High priority. Your best sellers - Requires consistent reordering and quality inspection.
– B: Medium-priority stock. Requires monthly reordering, but are not moving as quickly as A products.
– C: Low-priority stock. Minimal reordering required.
The ABC method also helps you determine where the inventory should be located in the warehouse, so that it's easy accessible to move.
More Accurate Financials
Decisions can’t be made without information.
Poor inventory management practices and lagging warehouse procedures can lead to inaccurate financial data.
Having an efficient inventory management software helps improve you stay on top of what's going on with your business, because it allows you to get more information and get it faster than if you did things manually.
For example: If a business owner has set up inventory in their accounting system, but they are not using a consistent way of entering the data, they run the risk of running into negative inventory quantities.
Having an accurate account on what’s being held is imperative to making informed decisions.
Automation puts information at your fingertips so you aren’t making hasty decisions with no data to back it up. You can gain deep insight into your processes with analytics and reports, thereby aiding decision-making.
Having an effective inventory management system will help you make more informed pricing decisions because you have a clear track record of your selling trends.
For example: If a product was not selling at a certain price point, and after you adjusted the price, it's now moving. This is the type of insight that helps you make data-driven decision.
Capturing data helps price products appropriately, ensuring profitability down the line.
Monitor + Predicting Sales Trends
Monitoring Inventory KPIs will help you see where you should be focusing your marketing and sales efforts.
If you have a product that is selling well, that also has a high contribution margin, you can drastically improve the performance of your business by pushing and marketing that product line.
In addition, proper inventory management ensures you are likely to have the right products on hand at the right time to meet customer demand. Having a proper inventory management system also helps predict trends based on historical data.
For example, having an inventory system provides forecasting that gives you a better idea on how much you sold last year at this time, or have sold in the last couple of months. This will let you know how much should you order and what is an optimal reorder point.
This will help you make sure you're not carrying too much that you can't sell.
When you find something that does sell, you have your fingertips on the market and you understand your customer. It helps you know where to focus your marketing efforts and target your market according to what products you might have.
Time Saving + Visibility
Inventory management software brings visibility into your operational procedures. Automating these operational processes provides significant time and cost saving.
This software can receive the inventory, count the inventory, and scan the inventory. This then goes directly to a bill in the accounting department. This reduces your investment in the hardware and labor hours you'd have to have if you were on premise.
Automation translates to more labor-hours available to you by providing significant time and cost savings.
By reducing the need of manual labor, as well as the number of employees needed on each project, automation translates to more hours focused on doing work that drives profits.
Finding The Right Inventory Management System
Having the right inventory management system is key in streamlining your operational processes.
There are two crucial integrations to keep in mind when considering an Inventory Management System:
Your Point of Sale System (POS): Make sure your Inventory management software can integrate with your POS system. This integration allows you to have more accurate sales projections—lowering the risk of investing too heavily into products that won’t sell.
Your Accounting System: Having your inventory management software system integrate with your Accounting System gives you the Actionable Financial Intelligence you need to get more accurate forecasting metrics and analyze your business working capital. This is the first step in getting the information you need at your finger tips to make data driven decisions to drive profitability
These platforms should all work together to move your products most quickly, increase profits, and improve cash flow. It's an environment that's all interrelated.
Not sure where to get started? Our advisory service department can help you optimize your systems and build this powerful ecosystem to drive growth.