Most small business owners don’t focus on inventory management. Part of the reason they don’t is because most small business owners don’t have the time and resources to devote to inventory management. Many are stretched too thin or focus on top line sales growth.
For a small business to thrive, it is important to focus on the top and bottom lines. However, it’s also important to manage your working capital assets such as inventory so that you can help the business create cash flow and more efficiently utilize the resources it has.
Here are some things to think about when managing your small business inventory.
Inventory is Money That Cannot Be Invested Elsewhere
First and foremost you should think of your inventory as part of your business’ working capital. It is money invested in the assets in your business. Most importantly, the money that you invest in your inventory is money that you don’t have to invest elsewhere. Holding too much inventory can cut down greatly on your cash flow and stunt your company’s growth.
As an example, I work for a company that does about $300 million in sales. The company used to hold about $60 million in inventory, including finished goods and parts inventory. A few years ago they put into place a plan to reduce inventory by 25%, while maintaining the customer service levels. Now that inventory is reduced by to about $45 million, our company has over $15 million in cash that it used to have invested in inventory. By controlling the inventory, that cash can be invested in research and sales and can be used to help grow our top line.
Inventory Carries Risk
Another reason to manage your inventory is to reduce the risk. Inventory carries several types of risk, but mostly the risk of obsolesence. If a product changes or is no longer needed, the inventory can become worthless almost overnight. Holding too much inventory means taking on more of this type of risk.
Another type of risk is the risk of deteriorating value. If newer products arrive that compete with your product there is a good chance that the older products will be worth less. Holding onto inventory that deteriorates in value means you have to write it down on your balance sheet, or sell it for less, both of which can hurt your small company’s bottom line.
Inventory Can Be Costly
Inventory can be downright costly to hold. After all, storage isn’t cheap and the more you hold the more your storage costs. Not just in warehouse rent, but in heating, moving, cleaning, insurance and the other risks that I mentioned above.
Find Ways to Reduce Inventory and Save Money
By actively managing your inventory you can be more efficient, reduce your costs, and bring more money to your bottom line. If you don’t have the time or the resources to do it yourself, try hiring someone that knows how to reduce inventory. Drop shippers can hold inventory and do the shipping for you. They are experts at managing inventory. Also, many companies like Amazon have services where you send them your inventory and they manage it and your shipping. There are hundreds of other solutions that you can find with a little research that are beyond the scope of this article.
Have any suggestions or comments about how your business takes advantage of their inventory issues? Leave us a comment.