It may seem obvious, but managing your business inventory is a number one priority to keep your business running like a champ. After all, without a reliable inventory, you could potentially face a backlog, financial hits, lost time, and, worst of all - lost customers due to the inability to fill orders. As you can imagine, there's a lot riding on having a solid, organized business inventory system. Whether you're learning how to open a retail store or you're currently reassessing your approach to inventory, these tips will show you how to avoid potential pitfalls to your success.
What Is Inventory in Business?
So, what is inventory in business, anyway? It's where you have materials, goods, and products on hand that you intend to sell to customers. These goods are typically purchased in bulk and stored - often in a warehouse - until a customer makes a purchase. Inventory can include raw materials, work-in-progress products, and finished goods. For some retailers, it can also include items purchased for resale. With proper inventory management, you can be sure your business can meet customer demands without overstocking or understocking. While all this sounds pretty straightforward, the reality is that your business's reputation and capacity to thrive hinges on proper business inventory management.
Types of Inventory in Business
It doesn't matter if you're trying to improve small business inventory management or you're starting a warehousing company, understanding the different types of inventory is your first, best step to staying relevant and solvent in any competitive market. Let's take a look at the breakdown of common types:
Raw Materials
These are materials that are typically needed for a final product. For example, an inventory of nails used to assemble a desk you have for sale. In this example, the nails are considered raw materials. In essence, raw materials are any items that aren't sold stand-alone but are used to manufacture a finished product you're selling to customers.
Work-in-Progress (WIP) Inventory
Work-in-progress inventory refers to items that are still in the process of being manufactured. These are not yet finished but have begun the production phase. Keeping track of WIP inventory helps businesses avoid production delays.
Finished Goods
When you pull raw materials to assemble a product as a WIP, at the end of manufacturing, you wind up with finished goods, which are ready to sell to your customers. Finished goods represent the final, end-product, which is ready to store or ship to your customers.
Maintenance, Repair, and Operations (MRO) Inventory
MRO inventory includes supplies that help maintain the business’s operations but are not part of the final product. Examples include cleaning supplies, tools, and machinery parts.
Safety Stock
Safety stock refers to extra inventory that a business holds to prevent stockouts due to unforeseen demand spikes or supply chain disruptions. This buffer ensures that businesses can continue operations even during unexpected changes.
The Importance of Business Inventory Management
We touched on this briefly, but let's really hammer in the huge importance of business inventory management. Let's say you have too much inventory (known as overstock). Overstocking means you're sitting on too much inventory, which can seize up your working capital and also cost you money because you're paying to store these items that aren't selling.
Alternatively, understocking means you don't have enough inventory. When this happens, your business suffers because you don't have the products in stock to provide to your customers. Ultimately, this can be crippling because customers aren't likely to shop with a business that doesn't have the products they want in stock.
Your best approach to business inventory is to make sure you have sufficient stock while not overstocking. The results? Happy customers, better cash flow, and a winning edge over your competitors.
Techniques for Managing Business Inventory
There are several methods businesses use to manage inventory effectively. Choosing the right technique depends on the type and size of the business, as well as the products being sold.
First-In, First-Out (FIFO)
As the name implies, first-in, first-out is when the oldest stock is sold first. FIFO is particularly relevant for businesses that deal with perishable goods, because it assures older inventory is used before it goes bad.
Just-in-Time (JIT)
The JIT method minimizes inventory by ordering goods only when needed. It's a good business inventory strategy because it reduces storage costs. On the other hand, just-in-time inventory means you've got to be extra mindful of your stock, and you have dependable suppliers who can deliver goods to you quickly in case you encounter unexpected surges in sales of a particular item.
ABC Analysis
ABC analysis divides inventory into three categories based on importance.
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Category A: Consists of high-value products with lower sales frequency.
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Category B: Includes moderately valuable items.
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Category C: Contains low-value goods with a high turnover rate.
Economic Order Quantity (EOQ)
EOQ is a formula that calculates the optimal order quantity to minimize costs related to ordering and holding inventory. This technique helps businesses avoid overordering while ensuring they have enough stock to meet demand.
Business Inventory Management Software
If all the details about types of business inventory and how to manage it are making you uneasy or confused - don't let it. Why? Because there are many different inventory management software systems, you can put into play to help you track your stock easily so you can streamline, anticipate, and organize your inventory more effortlessly.
Inventory management software can help you automate tasks such as tracking stock levels, ordering products, and analyzing sales data.
Here are a few software solutions you can consider for your inventory needs.
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QuickBooks: Suitable for small to medium-sized businesses, QuickBooks offers features to track inventory levels and generate reports.
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Zoho Inventory: This is a cloud-based solution ideal for businesses that need to manage stock across multiple locations.
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Fishbowl: This software integrates with QuickBooks to give you a full suite of advanced inventory management features for growing businesses.
How Inventory Loans Support Vendors
While all this talk about maintaining adequate stock might be helpful, if you're like most business owners starting out, you might be wondering how you get your inventory in the first place. If you don't have on-hand capital or funds to pay for bulk stock, you can consider the best inventory financing loans and lenders for your business needs. Inventory loans can be invaluable if your cash flow is tight, and you can lay in your products without being initially strapped financially. They can also help you run your business operations more smoothly, and a loan might also be ideal if your business encounters high seasonal consumer demands. At the end of the day, these loans can be a boon to your business, allowing you to restore your inventory without sucking all your cash reserves.
Best Practices for Managing Business Inventory
To be sure, managing business inventory can be tricky; it's a lot to track and maintain, but it can be done if you have the right practices in place, such as:
Regular Audits
If you want to be sure your records are as accurate as possible, do regular audits. Physical counts can be compared to digital records to identify discrepancies, such as theft or errors.
Use Reorder Points
First, what's a reorder point? It's a point when predetermined stock levels should alert an automatic order when inventory gets to a certain threshold. Be sure to establish reorder points before stock runs out.
Optimize Storage Space
Think about organizing your inventory based on the frequency of sales or value. This makes sure high-priority items are easy to pull and deliver to your customers. When you optimize your storage or warehouse space, you're essentially reducing costs and making it easier to access your stock.
Final Thoughts
We hope these insights into managing your inventory help you get more organized, save money, and, most of all - gain and retain customers. While much about keeping track of your goods might seem confusing, these tips are certain to set you on the right track so you can streamline your inventory and stay ahead of your competition. As always, thanks for reading, and we wish you all the best success in your inventory endeavors!