Do you have a clear picture of your business’s inventory? Oftentimes business owners will go far too long without reviewing inventory, only to find out it’s in desperate need of cleanup. While the year-end inventory count is a valuable internal control, only checking inventory once a year can lead to incorrect information accumulating over 12 months. This makes it difficult to monitor and improve the performance and profitability of your company.
The problem with keeping inventory accurate is that it can take a significant amount of time and resources. This is why many small businesses put it off until their tax accountant starts asking for it at year-end. Fortunately, there are alternatives to manually counting the entire inventory on a frequent basis.
Inventory can go out of whack for a few different reasons. The two most common reasons are theft and issues with your inventory management procedures. In the simple, but unfortunate, case of theft, it is difficult to identify and prevent it when you only count inventory annually. Issues with your inventory management procedures can snowball over twelve months and take time and money to unravel and correct. One of the most common issues we see is a lack of proper procedures for recording transactions, and these can often be remedied with a little accounting automation that cuts out human error. Spot-checking inventory can be a form of internal audit that helps you to identify and address small problems before they grow.
The best way to spot-check inventory is with a cycle counting system. Instead of doing an entire physical count on a monthly or quarterly basis, consider spot-checking different portions of the inventory at a time. There are three major methods of cycle counting that we recommend.
- Random Count – As its name suggests, a random count focuses on a random selection of inventory materials. This method is probably one of the best ways to identify and prevent theft. With no announced system for what inventory is going to be checked, a thief is taking their chances.
- Block Count – This method divides inventory up into specific blocks, which are then counted on a rotating basis. This is more of a defined system that could be figured out, but it creates a thorough way to discover problems with the inventory management processes. In other words, if your invoicing items are mostly correct but one is set up wrong, this method will help you find that mistake and correct it early on.
- ABC Count – The theory behind an ABC count is that 20% of your inventory represents 80% of your inventory costs. This can be especially true if you are manufacturing larger equipment items or specialize in sales of certain items. The idea with the ABC count is to focus on higher-priced inventory items and leave the smaller items for the year-end count. If your inventory management processes are set up properly, there is definitely a cost benefit to focusing and simplifying your count throughout the year.
Automate inventory management
If your inventory management processes consist of manually recording inventory in Excel, you could be exposing the business to unnecessary risk and wasted time. Adopting a cloud-based inventory management solution, such as Dear, can automate your inventory management processes. By using an automated solution, you reduce the risk of making human errors that can cause major discrepancies down the line and eat up valuable time. Dear can integrate with your central accounting system, such as Xero, to seamlessly relay data, eliminating the need for double entry.
A cloud-based inventory management app is key to having real-time insights into the business’s inventory data at any given time, from any supported mobile device. Need to check inventory at an event, or out with a client? All of the information you need is at your fingertips. With an inventory app, you reduce the frequency of necessary manual inventory counts, saving valuable time.
Inventory management apps can also provide business owners with valuable reports on the profitability of products, timelines, and other supportive data. This can allow business owners to make well-informed decisions regarding products, vendors, and pricing.
How to leverage inventory management to improve your profitability
So why is inventory management so important to performance and profitability? Inventory management can help business owners leverage inventory costs to improve profitability. When inventory is your core business asset, it can quickly become your main liability. All too often, products sitting on hand can lose value, depreciate, or become a complete loss over time. When that happens, it can reduce your purchasing power or ability to expand the business due to a lack of cash. On the flip-side, maintaining insufficient inventory can lead to supply chain issues that leave you incapable of fulfilling orders.
With up-to-date insights into the inventory on hand, business owners can use the data to:
- Identify which products are selling or sitting
- Identify which products have the highest profit margins
- Reduce unnecessary overstocking
- Properly determine COGS
- Increase liquidity
- Decrease waste
- Improve cash flow
Whether you utilize a spot-check inventory strategy, adopt a cloud-inventory management app, or run a combination of the two, the business will be in a better place to improve total performance and profitability. If inventory is your main asset, you should treat it that way and make it a top priority to enhance your inventory management. If you’re unsure of where to start, or which inventory management solution is best for your business, send us a message. We can discuss your business, current processes, and goals in order to develop a strategy fit for your inventory.