The Seven Hidden Costs of Not Properly Managing Inventory
10 Aug 2021
Managing your stock is crucial to your business. After all, it’s probably where much of your working capital is tied up. Clarity & Success say too many businesses try to manage stocks with values in excess of £100,000 without any sort of business software, and while they may make a decent profit, could it be better?
It’s easy to think ‘I counted it last year’, ‘I have a feeling for what I’ve sold and what I need’ or ‘Of course I know what makes me the most profit’, but really these attitudes can lead to plenty of hidden costs and lost opportunities.
Here are the most common areas that you need to think about to really maximise your inventory.
1 - Obsolete stock
How much have you got tied up in stock that is almost certainly never going to sell? How long have you had it?
If you’ve had it for over 2 years it needs to be moved on, either by selling it at special prices or by moving it through an online marketplace. Are there any other retailers who might want it for specific clients?
An inventory management system will be able to generate a report at any time that gives you this data. It may be a real surprise when you run it, but what it will do is focus you on the area where you need to make some changes.
Oh, and when it’s gone, remember not to buy any more of it!
2 - Insurance
If you don’t really know your current stock valuation, you may be under-insured, or even over-insured and paying too much in premiums. More and more, insurers are looking for some proof of inventory holdings when dealing with claims.
In the event of a theft or damage to premises, could you provide insurers with a detailed inventory list so you can move a claim through the system?
3 - Missed opportunities
If your capital is tied up in slow-moving or obsolete stock, it’s not available for things like marketing, promotion, and even for buying more of the fast-moving or new season items.
It’s also cash that’s not available for store improvements or other investments, meaning you may have to take out a loan where you may not need to.
4 - Not knowing your best sellers
We often have a view of what sells the best, but is that on a total value per item basis or total turnover? They may be the best sellers, but are they the most profitable? Do we just think of the expensive items or do we consider consumables like watch batteries?
Have you noticed any shifts in customer demand? Interests change over time and what was popular last quarter may not be so popular next quarter.
A good management system can tell you this so you don’t rely on memories and hearsay. You may be tying up capital in something which sells in quantity but generates low profit levels when you could be investing in the really profitable areas.
5 - Not knowing what you need
When it comes to ordering stock, we don’t want to rely on memory as to what we’ve sold, or spend time looking through sales histories.
After all, we’ve all been to the supermarket without a list and bought something we thought we needed, only to find we already had 3 in the cupboard at home.
Knowing your stock movements and stock levels means you won’t waste capital buying extra stock that won’t sell for a while.
6 - Tax implications
There may be tax implications if you under or over-report inventory levels, meaning you may pay more tax than you should, or worse, not be paying enough tax, with all the implications that may bring.
7 - Irregular Stocktakes
It’s a boring job, so it gets done once a year and then is often hurried. A lot changes in a year, and you may not know about missing stock until you do the count.
A better way is to make regular checks in smaller chunks by counting specific areas more often. It makes the task quicker and easier, and a good management system will make this easy for you.
What’s the answer?
It’s a lot to think about, but a really good inventory management system will pay back its investment in a very short space of time, typically in under 2 years, sometimes within 6 months!
It will help you free up capital, find the least and most profitable lines, work more closely with your suppliers and maximise your profits.
It will tell you your stock turns, that is a ratio of the costs of items sold divided by the average stock valuation. Ideally, you’ll want that number to be as high as possible – 1 is not good, 4 is better, 8 is fantastic.
It will help you easily manage your stocktakes so you really know what you have in stock.
On top of that, it could interface with your accounts system, manage your customer records, manage your staff and even track your repairs.
That can’t be bad can it?
Clarity & Success claim their evolution platform handles inventory management, POS, reporting and repairs. Speak to our sales team about how we can help you uncover those hidden costs.
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Source: Clarity & Success
Source: Clarity and Success