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Inventory Control Is Sound Management Strategy

January 13, 2010

Even good businesses can run into financial problems. For most manufacturing and trading companies, inventory is the most important current asset, as well as the least liquid one. 

Excessive inventory has two drawbacks: it ties up cash, and overstocking may force you to make deep price discounts to recover even a portion of your cost. As a result, entrepreneurs usually want to keep inventory levels as low as possible. On the other hand, too small an inventory results in shortages that can interrupt your service, send your customers to competitors, and also cause you to forgo quantity discounts from your suppliers. 

Ideally, your inventory should:

  • meet demand
  • prevent product aging
  • consistently earn a satisfactory profit.

 This is a difficult balancing act, but one that every successful business operator must achieve. 

Inventory involves tangible expenses that extend beyond the direct costs of purchase. Moving, storage, insurance, taxes and staff time to manage the inventory all tie up cash that would otherwise be used for other operating expenses or profits. Yet even a small reduction in an inventory investment may result in large changes in the firm’s cash position. 

A good way to establish inventory controls is by determining the annual average turnover rate: total sales divided by the average amount of inventory for a 12-month period. This simple measure provides a baseline for setting goals and evaluating performance. 

Consult your trade association or other industry sources for comparative data. Also, evaluate the composition of your inventory. You may have low-ticket, high-turnover items as well as high-ticket items that you sell in a smaller quantity but at higher prices. 

Good recordkeeping is essential for tracking inventory. A variety of recordkeeping software products are available to simplify this ongoing task. 

For more information about inventory management, contact SCORE Lancaster, “Counselors to America’s Small Business.” SCORE’s more than 50 mentors provide free and confidential business counseling to small business owners. Call us at 717-397-3092, or fund us online at www.scorelancaster.org

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