Introduction

Did you know that inventory management software is important to the success of 73% of small businesses? Although inventory management software has become increasingly important among small firms, there is still a high frequency of ineffective inventory management approaches.

In business, inventory management refers to the practice of keeping track of and recording the items in a company’s inventory. It is a supply chain management system that is used by small business owners or managers that have limited time, money, and labour to monitor the supply chain and inventory levels in their businesses.

Inventory management can make a significant difference in the success of small enterprises. It is a proven fact that a company can be successful if its inventory turnover and in-stock level are regularly checked and controlled. Inventory management helps businesses save both time and money while also improving the efficiency of their operations.

Product barcodes can be created for products, and inventory management software can be used to handle purchase order procedures, real-time data tracking of stock levels in retail outlets and warehouse storage space, as well as manage production costs and improve the cash flow forecasting process.

Engaging questions

How do you know what to buy?

What is the purpose of a stock-taking system?

How can you control costs by using an inventory management system?

Background

Those who work in manufacturing or retail would certainly agree that inventory management (also known as stock management) is one of the most challenging issues that businesses of all sizes, large and small, must deal with. Businesses could lose a significant amount of money in a short period if the process is not carried out accurately and efficiently.

International Accounting Standard IAS 2 defines inventory as assets that are either:

1. kept for sale in the ordinary course of business (finished goods); or

2. in the process of manufacturing for sale in the ordinary course of business (Work-in-progress)

3. in the form of materials or supplies that will be used throughout the production process or the provision of services (raw materials, consumables, and some spare parts).

Most small businesses believe that finished goods are the only type of inventory they have. They fail to take into consideration the other two categories of stock, which can result in complications.

Characteristics of ineffective inventory management.

Inventory management issues are numerous in general, and they frequently present themselves in the forms mentioned below:

1. Insufficient inventory

Maintaining an insufficient inventory puts you in danger of not being able to fulfill orders and puts your ability to reach your revenue goals in jeopardy.

2. Excess Inventory

It is keeping an excessive amount of inventory, which is locking up funds that could have been better invested elsewhere in the business.

3. Hold inventory for too short

Some inventory items improve with age, and the early disposal of the items (for example, unripe or fully ripe agricultural crops) might result in the items being discounted in the marketplace.

4. Hold inventory for too long

Keep in mind that keeping inventory on hand for an extended period puts you in danger of stock items expiring, going stale, or becoming outdated.

5. Inadequate storage

Damaged items will be returned to the manufacturer rather than being passed on to the customer if there is insufficient storage space on the premises.

6. Not factoring indirect costs

Failure to account for the cost of holding and carrying inventory. These can result in a substantial increase in the cost of a stock item. Suppose they are not included in the price of the item. This will most certainly result in a large undervaluation of stocks and a loss of profits at the time of sale.

7. Not factoring in fixed costs

Failure to consider additional fixed expenses linked with stock will result in problems like those described in mistake number six above.

8. Inventory controls are lax

This is, by far, the most challenging problem for small business owners to deal with daily. Many things are frequently stolen directly in front of them as a result.

There have been specific problems arising because of inadequate controls, but they are significantly less common than the total number of objects stolen. Employees of a company will typically notice when stock products are not being thoroughly controlled and will take advantage of the situation to steal the items in question. They may also easily collude with vendors or consumers to steal items without paying for them, which is detrimental to the company’s bottom line.

Suggestions for effective inventory management

A few suggestions to help small firms with effective inventory management are provided below.

1. Adhere to the “First in, first out” (FIFO) principle.

This is the most dependable inventory management technique, even though it is not always feasible. Businesses should strive to sell stock products in the same order that they received them. Typically, this method would be used to address stock that has been sitting unsold for an extended period and has thus become unsalable.

2. Track Inventory Always

There should be a well-defined system in place to ensure that an adequate number of products are always available at the appropriate time. Economic theory tells us that we should estimate the appropriate reorder amounts and when to refill to maintain decent consistency. This can be beneficial in identifying inventory items that have been sitting in excess for a prolonged period or that have been ordered in large numbers. A knowledgeable businessperson knows exactly when and what to keep on hand for customers. Using inventory management software that has been intelligently designed, you may eliminate any uncertainty in your inventory.

3. Spot check your inventory at regular intervals.

Many business owners are already aware of the importance of inventory management and schedule time to perform stocktakes at least once each month. Although it is important to incorporate a certain amount of unpredictability into the process in general, it is more important when stock disappears exclusively whenever a predetermined periodic count takes place.

The possibility of executing a stock count and discovering large disparities between book and physical values is extremely high if the essential protections are not in place before doing so. The fact that we can compensate for this discrepancy will not change the fact that the fundamental issues that caused the variance will continue to exist.

4. Assign clear responsibility

Rather than waiting until the next stock take, affirmatively give someone in the organization the general duty of preventing deviations from arising in the first place and flagging areas of concern as soon as they arise.

5. Consider drop shipping.

The type of business you run as a small business and the type of product or service you sell may allow you to sell items without always having a huge amount of inventory on hand. If you want something delivered exactly as you requested, drop shipping is a technique of distribution in which the manufacturer or distributor is responsible for managing inventory and transporting things to you. It carries certain hazards, but it has the potential to be an immensely successful inventory management tool if used correctly.

6. Consider Tagging

It is beneficial to tag stock products to combat employee theft, especially when the products are in high demand. Bar code scanning (both in and out) is a low-cost but extremely effective kind of tagging that is extensively used. On the other hand, it is simple to dismiss.

When it comes to product identification, bar codes are sometimes employed, but there are other times when physical labelling is necessary. If you are dealing with similar interchangeable stock products, tags make a lot of sense.

Keeping five identical things on hand no longer makes sense; labelling may now be used to distinguish the five identical objects from one another instead of keeping them all together.

7. Use cloud-based inventory management software.

It is impossible to overstate the impact of digitalisation and automation, particularly in today’s environment. Maintaining control over inventory management is always a potent tool in the management arsenal, especially when there are insufficient staff members to carry out inventory activities properly daily. Inventory management software that has been properly created provides real-time data and analytics that assist company managers in making the best inventory management decisions possible in their respective industries. With the integration of QuickBooks and Sage accounting software with other company activities, it is feasible that small businesses will no longer require separate inventory software in the future. Other separate software may offer additional features, but the most effective use of the software is when it integrates seamlessly with the overall accounting software in use.

8. Adequate physical controls

When the actual controls over the stock are inadequate, all stock management advice will be rendered insignificant. Incorporating physical control tactics into your business may include, among other things, putting stock items away, using demo stock, installing CCTV and cameras, and limiting access to unauthorised personnel, clients, and vendors.

Suppose it is straightforward for staff or consumers to gain unhindered access to stock goods at a warehouse. It is in this situation that the inventory management system becomes useless.

Features of good inventory management software

• Be easy to use

• Be intuitive

• Have a clear understanding of business processes and needs

• Help track inventory in real-time.

Inventory management software will help:

• Track the right products in the right order at the right time.

• Set inventory levels to maximize cash flow forecasting and management processes.

• Maximize your business profits by keeping costs down while shipping orders quickly and efficiently throughout your supply chain system.

Tips for Manufacturing Enterprises

Inventory management is essential for manufacturing organizations to fulfil orders and generate revenue.

When running a manufacturing company, being able to effectively manage your inventory is critical to your success. Your product will not be able to be manufactured if you run out of components. You are losing money if you are stuck with merchandise that has been hanging around for an extended period.

We believe that categorising your inventory into the following three groups is the most effective approach to managing it:

1) Raw materials: These are the materials that go into the products you make.

2) WIP (work in progress) – These are products and parts that have already been manufactured but are not yet finished or ready to be delivered to customers.

3) Finished goods: These are the finished products that are ready to be sold and shipped to clients after they have been completed.

Following a logical path from raw materials, all the way through to finished goods will be easier if you have the following three categories: It will provide you with a clear understanding of the state in which your inventory is, which will assist you in ensuring that there is no waste or bottlenecks anywhere along the line.

A shipment of raw materials, for example, may have been sitting for weeks without making any progress toward becoming finished goods; this indicates that something has gone wrong and that it must be corrected immediately before any more money is spent.

Tips for Retail Enterprises

In comparison to manufacturing organisations, retailers must manage their inventories to have a sufficient supply on hand. They can be confident in their ability to meet customer demand to a high degree. Furthermore, retailers are frequently more vulnerable to swings in demand and inventory levels than other types of businesses.

Consider the following tips for inventory management:

1. Monitor demand carefully. Keep track of how rapidly goods are selling and use that knowledge to determine how much inventory to acquire in the future to keep your business running smoothly.

2. Forecast demand. Because the future is unpredictable, it might be difficult to predict what will occur, but prior inventory data can assist you in making an educated bet about what you will be required to acquire soon.

3. Streamline order processes for suppliers. Order processes for suppliers should be simplified. If you receive more frequent deliveries from a greater number of suppliers, there is a greater probability that you may wind up with an excess of some things and a deficiency in others.

4. Make sure your employees are aware of how important accurate inventory counts are.

Managing lost, damaged, or stolen items

No matter how hard you try, some inventory will always be lost, damaged, or stolen, regardless of how diligent you are. Simply put, it is an unavoidable aspect of running a business. However, there are some steps you can take to make sure that these occurrences are as exceedingly rare as possible in the future.

Whether you are losing track of damaged or stolen products, or simply misplacing them, it may be quite costly, both financially and psychologically.

For those that want to tackle stolen or damaged inventory, here are a few pointers to get them started:

• Make certain that you have the appropriate tools. If you are still handling inventory management by hand, it is time to make the switch to an automated system. The internet is filled with a plethora of tools that can assist you in maintaining real-time control over your inventory.
• Keep all your inventory in one location. This is especially critical if the location in question is one where items are routinely misplaced. It will be easier for everyone who requires access to the information if everything is kept in one location.
• Keep track of your stock levels and inventory using a variety of ways, including software and spreadsheets, to ensure accuracy.

Conclusion

Even though the above information is by no means exhaustive, it demonstrates that small businesses require an effective inventory management solution to remain competitive while keeping prices low.

Inventory management software should not be complicated or time-consuming to use; rather, it should be simple, flexible, and effective. Because of the fast-paced nature of today’s industry, small firms must seize every opportunity to save costs and produce innovative solutions.

If you understand how much time and money it takes to just run your organization, inventory management may account for a sizeable portion of that opportunity.

The statement of financial position (balance sheet) prepared by the Chief Financial Officer typically includes a substantial amount of inventory. Although inventory management is not the primary responsibility of the CFO or accountant, bad inventory management can have significant financial consequences for a company, ranging from low sales to high carrying expenses.

If you are suffering financial difficulties because of inventory management concerns, we advise you to contact us as soon as possible.