Why Inventory Counts Matter
The past few years have forced many small businesses to face issues with the supply chain that they had previously never considered. Even the most prudent risk manager couldn’t have anticipated the far-reaching impact that the pandemic had on nearly every aspect of life. These new challenges have changed purchasing habits for many small businesses and as things start to return to normal, practices, such as inventory may need to be reevaluated.
During the height of the supply chain crisis, many companies tried to anticipate future needs by ordering additional inventory that they wouldn’t normally carry to prevent delays. This approach, while mitigating inventory issues, potentially impacted cash flow which could still be impacting the business today. So how can you redefine what is “normal” for your business now?
Complete a physical inventory
This may seem like an obvious one, but until you consolidate and review all your physical inventory, you may not know how much you have on hand. When storage becomes tight through bulk ordering, things can get lost in corners and closets that aren’t the usual spot. The first step is to find it all. Then review items to make sure perishables are not expired and seasonal items still make sense for your business to retain. Check with your vendors to see if they have any buyback programs available. If it doesn’t make sense for you to keep on hand, start investigating ways to move it out of your current inventory such as promotions, sales, giveaways, or donations.
Establish Par Inventory or Reorder Levels
Once you know what you have on hand, you’ll need to determine your use rate. If you maintain inventory for building widgets, it can be as simple as reviewing all current contracts and widget demand. Before signing any future contracts for widgets, the bill of materials and inventory should be consulted and product lead time factored into your deliverable dates to the customer. It’s a little bit trickier if you’re in a retail space where your internal operations are not driving demand, rather you are reliant on consumer habits. Review sales trends to determine your most popular items, average number sold, determine if there is a fluctuation month to month, and examine lead time. These factors will all influence how soon and how many items should be ordered at a time.
Keep Counting
Though there is nothing wrong with utilizing good ol’ fashioned paper and pen to complete inventory, there are many solutions at a variety of price points that may assist in the inventory process. How often does it make sense for you to count inventory? We recommend that a monthly inventory be taken whenever possible to make sure that it is properly recorded on the company’s balance sheet. One of the benefits of utilizing an inventory solution is that many can alert you if reorder level is reached. This streamlines the ordering process by allowing the software to generate your order list and confirming count at the end of the month. Many also have a receiving feature that keeps your inventory up to date as you add products and integrate directly with your point of sale, removing items from inventory as needed. Counting less frequently can lead to issues in determining your inventory value along with the expense associated with utilizing items in inventory. It can also lead to large adjustments at the end of the year that skew your financials, making data comparisons month to month or year to year difficult.
Other items to consider
Inventory can be a beast to tackle but once you have the basics, you can start considering other influencers and continue to streamline your process.
What is your inventory valuation method? First In, First Out (FIFO), Last In, First Out (LIFO), or Weighted Average Cost (WAC)?
Determine if all products are necessary to keep in stock. Should certain items no longer be carried, or should they be special order only?
Organization. Though it can be very time intensive, determine if the current organization of your inventory goods makes sense. Consider labeling shelves and indicating bin numbers on the inventory sheet, or restructuring your inventory count list to flow in a similar way that items are stored.
