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Updated: Jan 4, 2019
There are two critical components to running a sustainable business operation: managing cash flow and managing inventory.
And the two are closely correlated: inventory is both an investment and a means of profit — and how you manage it has a direct effect on your business’ financial health.
“Too much inventory increases your storage expenses and also ties up free cash flow that can be used in other areas of your business,” said Michael O’Donnell, CEO of Cave Tools, a company that sells high-end grilling and cooking tools.
On the other hand, he explained, running out of stock has the potential to lower your ratings on third-party ecommerce sites, which may force you to spend more money on marketing to get the demand back up.
The key is striking the balance between having too much and too little inventory, said Lisa Chu, CEO and owner of Black N Bianco, a kids’ apparel company. “Once you find the perfect balance,” she said, “that is when your business is healthy and profitable.”
The answer: strategic inventory management. It helps prevent spoilage, cut down on storage costs, boost order fulfillment, and increase cash flow.
Ready to revamp your inventory? Here are five smart inventory management techniques.
A first in, first out (FIFO) system means you sell old stock first and new stock last. Huib Maat, the in-house perfumer at Pairfum, an artisan fragrance house, said he uses this method to ensure stock stays fresh.
FIFO helps prevent perishable items like food, flowers, and beauty products from spoiling, but it’s just as important for items that don’t have an expiration date. Think: kitchen gadgets or iPhone cases.
Getting rid of your oldest stock first reduces the likelihood that your products will become outdated or obsolete before you can sell them. This is also known as dead stock, and happens when a product is “no longer relevant in the market,” said Chu.
To execute FIFO effectively, you need to organize your warehouse accordingly. Load new stock from the back and store older products toward the front or near the packaging area so you can retrieve items easily. You can also organize items using date tags or bar codes to ensure your team pulls the correct stock.
“The key to good inventory management,” said O’Donnell, “is how well you are able to collect, manipulate, and visualize data.”
Analyzing the numbers can help you better predict product demand and avoid purchasing too much or too little inventory. The data you examine should be vast and varied, taking into account the previous year’s sales, current promotions, market trends, consumer shopping habits, product growth rates, seasonality, and the overall health of the economy. You can use inventory management software like LOCATE to examine your business’ data or tools like Salesforce Analytics Cloud to conduct market analytics tests.
“We run six-month projections every three months based on year over year data and current sales trends,” said O’Donnell. These reports include a combination of quantitative data and qualitative information, which helps “tell the story [of the products] and explain performance,” he said.
O’Donnell also said he measures past projections against the current numbers to see how they stacked up. This practice can help you make more accurate predictions long term.
Monitoring stock is fundamental to good inventory management, but tracking the items that go in and out of your business on a daily basis can be tedious.
“For us, the single best tactic to optimize our supply chain was to digitize everything,” said Maat. With inventory management software, every product gets assigned its own unique barcode, he explained, which makes it easier to search for and track.
Not only does this save you time and reduce the likelihood of error, but it also helps you make more informed sales projections. That’s because cloud-based inventory software provides detailed sales and performance analyses for every SKU, Chu said. This information can help you decide which products to prioritize for sale, discount, or terminate, she explained.
Many companies like Square, QuickBooks, and Salesforce provide real-time sales analytics, organize purchase orders from vendors, and send email updates about low-stock items so you have time to order more.
Managing inventory requires constant problem-solving. You may need to restock a popular item fast, for example, or replace products that aren’t selling. It’s much easier to meet changing demands when you have a solid relationship with your supplier.
“Always start with building a true face-to-face relationship with your manufacturers,” O’Donnell said, “and visit them multiple times per year so you can be on the same page.”
During and between visits, it’s crucial to establish a clear line of communication so you can discuss your needs, share product updates, and confront issues as they come up. You should also make it a priority to pay your suppliers on time and regularly show your appreciation for their work.
When you cultivate mutual trust and respect, your suppliers are more likely to be flexible and accommodating should you need to negotiate a new minimum order quantity, for instance, or request faster production on certain items.
Finally, it’s important to take steps to ensure your inventory is accounted for and in good condition. The first step is regular auditing. Even if your inventory management software provides a real-time count of your stock, it’s smart to periodically check that the count matches what you actually have in your warehouse.
Depending on your business’ schedule and available resources, you could either conduct an annual physical inventory or do regular spot-checking. The former is a time-consuming process that involves counting each item one by one. Spot-checking is when you choose one particularly popular or problematic product to count on an ongoing basis and compare the physical numbers to your software count. Using an online system like Unleashed makes it easy to see your stock count and compare numbers when auditing.
It’s also important to conduct regular quality control (QC) tests to ensure your inventory is in working condition and ready for customers. That includes inspecting items for damage as well as checking other components, like whether products are packaged properly.
“In our case, we QC during manufacturing at every step of the process,” said Maat. “We have further QC points when the goods go into our ‘pick and pack’ warehouse and when they are being sent to customers,” he explained.
Stellar inventory management is better for your bottom line. If your business is losing money, try these techniques to overhaul your inventory system and start earning more.
Paige Smith is a Content Marketing Writer and Senior Contributing Writer at Funding Circle. She has a bachelor's degree in English Literature from Cal Poly San Luis Obispo, and specializes in writing about the intersection of business, finance, and tech. Paige has written for a number of B2B industry leaders, including fintech companies, small business lenders, and business credit resource sites.