The importance of an inventory management system often only becomes apparent to a business when it starts going through a number of ‘unexplained’ problems.
In reality, they’re not unexplained. The problems start because the business owner does not have an efficient system for tracking inventory and materials on hand.
Without knowing how much inventory you have on hand at any point in time, your financial figures will always be incorrect.
And, without knowing accurately what level of stock or materials you are holding, your profit figure will always be wrong.
Any other measurement like stock turnover (how quickly you convert your stock to a sale) is also going to be completely wrong.
What are the tell-tale signs of poor inventory management?
The symptoms of not having an accurate and up to date record of inventory on hand include:
- Having more materials and stock than you think you do
- Having stock sitting around for months – because the price or discount was too good to turn down
- Having obsolete or spoiled stock because it wasn’t used or sold (you bought it two years ago because of the great discount for buying in bulk!)
- Having no idea of how much ‘stock shrinkage’ due to theft or misuse
- Not knowing what stock you actually have
- Not knowing how long it takes to order more stock and have it delivered
- Not being able to tell for certain what is selling and how much stock you have on hand
- Not being able to quote gross profit figures for each product you sell – because you don’t know what your inventory level is or how much it really costs
Remember – if you don’t know how much you make from each sale, you won’t know with any accuracy what your profit really is.
Are you making these excuses for having no inventory management system?
Typically, we hear business owners using three arguments for not having or not using an effective inventory system that is updated daily:
- They think it costs too much to use an inventory system;
- They prefer to use an Excel spreadsheet – complete with its unique errors and inaccuracies;
- They can go on gut instinct.
In reality, they are excuses.
Importance of an inventory management system
The importance of an effective inventory management system should be clear:
Without accurate financial figures, how can you make informed financial decisions about your business?
Some business owners keep a stock system completely separate from accounting and only update the value of stock on hand at the end of each financial year.
Whilst this is better than not knowing at all, it’s not helpful throughout the year as your financial reports and indicators will all be wrong. At a minimum, this figure should be updated monthly.
Your inventory management system should integrate seamlessly with your accounting package on a daily basis. Again, stock on hand should be updated monthly at a minimum.
Development of Software as a Service (SaaS) or cloud technology environments have enabled inventory systems to be easier to use, more cost effective, and more readily available – with more options.
There really is no excuse for not knowing what your inventory and material levels are. There’s no excuse for not having accurate, up-to-date financial information with which to run your business.
How do you get started with an effective inventory management system?
Like with any freely available software, you can go it alone with choosing it, setting it up, and managing it.
In our experience, this won’t give you the smoothest or most accurate implementation. It can lead to problems with information being shared correctly with your accounting system.
We recommend that you use an accountant or advisor who is familiar with the inventory and materials management tools available for your industry and how they integrate with your accounting system.
They can help choose the most appropriate inventory software application for your business, help set it up correctly, and train your staff to use it correctly.
Even better, they will help you use the financial information to run a more profitable business.
Contact us here for more information on how to get started with this.