Almost any business that sells goods has periodic costs related to inventory, such as storage, security, insurance, shipping, and losses due to theft. By strategically managing these expenses, you can minimize these costs or even entirely eliminate some of them. Some ways to do this include choosing a new inventory management system or streamlining your old one. Here are some other steps your small business can take to keep its inventory costs manageable.
Conduct Regular Inventory Counts
The first step in managing inventory issues is taking stock of your inventory to view developing issues in real-time. It helps to schedule and conduct regular inventory counts. Periodic inventory counts alert you to any issues, such as internal theft and control problems, and may also uncover damaged or expired goods you need to replace. These counts can save you money in the long run by ensuring you don’t have to purchase last-minute inventory to keep your retail shop stocked. This action helps eliminate higher shipping expenses. When you know what stock you have on hand, you can better prepare for the future. Counting your inventory lets you see which items sell faster and slower so you can tailor your orders accordingly.
Use a Formula to Make Inventory Costs Manageable
Strategic planning helps you know when it’s time to place inventory orders based on your current available inventory and customer demand forecasts. If you plan on ordering in bulk to avoid flat fees on smaller orders, keep in mind you may end up paying more than you save in storage costs for larger orders. The economic order quantity (EOQ) formula can help you find the sweet spot between ordering and storage costs. A vital measurement for supply management, logistics, and operation, EOQ helps you balance out ordering and holding costs by calculating how much and how often you should purchase inventory.
Using EOQ makes it easier to satisfy customer demands while keeping ordering costs to a minimum by providing the most cost-effective order volume for your needs. So how do you calculate it? You can use a formula to calculate the numbers by hand, but it’s easier to use an online calculator, such as the EOQ Calculator, to do the heavy lifting for you. When you determine your ideal order volume, you can also take advantage of software tools, such as reorder alerts within QuickBooks Online, which provides you with automatic notifications when you reach your reorder point.
Create Accurate Sales Forecasts
Accurate sales forecasts help you know how much inventory you need to keep on hand at all times. This keeps your storage costs down while ensuring you always have the products you need to satisfy customer demand. When creating a forecast, it’s important to leave your expectations behind so you don’t emotionally invest in the process. This means objectively gauging market trends along with your sales trends, and researching current and potential competitors. You should also keep in mind the seasonal changes of your business so you can account for short-term implications when you make an inventory order. With all this knowledge, you’re better able to project future outcomes.
Use Just-in-Time Inventory Management
If you want to cut or even eliminate inventory carrying costs, consider using the just-in-time (JIT) inventory management – this system keeps very little inventory on hand. Instead, you only order what you need when you need it. Though you may rack up higher order costs due to shipping, you don’t have the expense of storing or managing inventory. This inventory management system works best for businesses that have strong relationships with and confidence in their suppliers. It’s important those suppliers must also have properly managed inventory systems. If you go this route, remember to keep a close eye on customer orders and make sure you don’t take orders you can’t fulfill, since you don’t have backup stock.
Though you can’t entirely eliminate inventory management costs, knowing your options can help keep your expenses low. In turn, low inventory management expenses gives you more money to spend on improvements that can boost your bottom line. To aid in bookkeeping, management, and even logistics, 5.6 million customers use QuickBooks. Join them today to help your business thrive for free.