How Does Inventory Management Impact Your Financial Reports?

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If you’re in retail, food, or commodities, then the financial inventory management is a huge part of your daily operations. And you’re probably acutely aware of its impact on your financial reports: Great inventory management translates to a better bottom line all-around, but lackluster inventory management can cost your company enormous amounts of money. So how do you get a handle on inventory management—and your company’s finances?

You can start by recognizing the ways that inventory management impacts your financial report. Use those metrics to your advantage to trim your shrinkage and take control of your inventory.

Inventory management can:

Help You Forecast Sales

Accurate sales forecasting helps you prepare for natural ebbs and flows in your business. Minimize excess stock heading into the off-season, and stock up on best sellers when you’re about to go into peak season.

An inventory management system with forecasting capability allows you to set forecast periods (usually defined by one month’s time), and predict trends, or short-term increases in demand.

It also lets you predict base demand, or the long-term demand of the product, so you know how much to stock on an ongoing basis. From there, you can determine the reorder level and automate re-ordering on a scheduled basis.

Here’s how (it’s a simple equation):

Reorder Level = Avg Daily Sale X Lead Time (Days)

Identify Low-Turn Stock

Inventory management data allows you to flag low-turn stock. A low inventory turnover ratio indicates that the item in question is selling too slowly to be profitable. This lets you easily and conclusively identify problem items and remove them from your stock to save money.

All you have to do is calculate the ratio (R).

Where G=cost of goods sold, and a=average inventory,

G / a = R.

So what do you do with that information? Items with a low ratio should be purged from your inventory, making room for more inventory of high-ratio items that historically have sold quickly and at high volume.

Protect Category A Stock

If you have multiple tiers of stock price points, chances are that you already have them organized into categories. Premium, high-dollar stock is Category A, and it’s the most susceptible to shrink. The average business has 2 percent of their total inventory value in shrink, or lost stock, which is worth working to lower.

Investing in an inventory management system gives you better control over your counts. You can cross-reference manual and scanner counts to pinpoint specific discrepancies, such as product always going missing on a certain day of the week. And you can catch problems as they arise, rather than once they’ve had a chance to accumulate.

Minimize Spoilage

Do you have a perishable or consumable product? Whether you run a cafe, sell handmade candles, operate a candy factory or a bakery, you’ve had to deal with spoilage.

And it’s expensive! 21 percent of all food waste in restaurants comes from spoilage. Perhaps you over-order shrimp one week by mistake, and end up throwing away 15 percent of that order simply because it went bad before it got used. That adds up fast when it’s a regular occurrence.

With an inventory management system, there’s rarely a reason to manually order: the system tracks and learns your rules for ordering, and applies them. You never get shipments with items you won’t use up in a timely manner.

Trim Storage Costs

Inventory takes up space, and space costs rent and utilities. Whether you’re renting a storage unit for excess inventory, or renting a larger operational space to accommodate inventory, you’re coming out a few dollars poorer for every extra piece of inventory on hand that doesn’t turn quickly.

Having an accurate count of your on-hand inventory allows you to trim away the extra, and only stock what you’ll actually sell that period. Your cash is free to work for you, and not tied up in a warehouse somewhere.

Save Money on Order Costs

Between shipping, handling, couriers, tariffs, taxes, and other costs associated with receiving inventory, most companies benefit from setting an Economic Order Quantity, or EOQ.

Adhering to an EOQ helps ensure that you’re carrying enough inventory to meet demand, but without causing unnecessary storage and shipping costs.

You’ll need to set variables for D=fixed cost per year, S=demand in units per year, and H=carrying cost per unit per year.

Then, it’s a simple equation:

In this formula, Q = EOQ.

Some types of inventory management solutions allow you to set and automate the EOQ, so reordering is completely hands-off: yet another way to trim the fat, because you don’t need to spend time tracking quantities and placing inventory orders.

Maximize Cash Flow

Inventory doesn’t help your cash flow unless it’s selling consistently. Having a solid handle on what’s leaving the shelves gives you the ability to time orders with accounts receivable, so you’re always a step ahead of the next month’s expenses.

Sitting on 500 cases of product doesn’t pay the bills, even if it does ensure you won’t run out of stock in the distant future. Your goal should be that your company’s capital is as liquid as possible, and not tied up in excess inventory. While still maintaining adequate levels to take care of your customers.

An inventory management system ensures that you can accurately predict what you’ll need from order to order, and only purchase (and store) the inventory that you’ll actually sell, and no more.

All of these little impacts add up to one major benefit: a financial report and bank account that’s solidly in the green. The more waste you trim away from your inventory, the better your business will thrive financially!

Ready to get your inventory management small business in top shape? A working capital loan through Mulligan Funding can help you finance investing in a new IMS. Call Mulligan Funding at <a href=”tel:855-326-3564″>855-326-3564</a> to discuss your financing options today!

The information shared is intended to be used for informational purposes only and you should independently research and verify.

Note: Prior to January 23, 2020, Mulligan Funding operated solely as a direct lender, originating all of its own loans and Merchant Cash Advance contracts. From that date onwards, the majority of funding offered by Mulligan Funding will be by Loans originated by FinWise Bank, a Utah-chartered Bank, pursuant to a Loan Program conducted jointly by Mulligan Funding and FinWise Bank.