Having enough inventory to meet your customers’ demands is essential to running a small business. While having enough of your products is important, having more inventory than you can sell in the short term might be hurting your bottom line. Consider these tips to help you avoid the physical and financial burdens that excess inventory can impose on your business and turn extra inventory into usable working capital.
Balance the Benefits Versus the Costs
There are some benefits to holding high inventory levels. Small businesses typically save money on a per-unit basis when they buy inventory in bulk and may pay less for shipping as well. These savings can add up, allowing you more to spend on something else.
You’re also less likely to lose a sale due to being out of stock on a product if inventory levels are higher. Keeping your products flowing out the door at a steady pace, without any delays, can cement your reputation as a dependable provider.
Excess inventory takes up valuable storage space you could be using for other items. You also have to pay for that space, and it typically needs cooling, heating and ventilation. Add the costs of financing and insuring the inventory, counting and monitoring inventory levels, the loss of perishable items – the cost of working capital tied up in the extra inventory soon begins to take its toll.
In addition to the physical cost of keeping inventory levels high, larger inventories require business owners and managers to spend more time communicating with suppliers, preparing orders, and figuring out how to increase customer demand to justify the high inventory levels. This is valuable time inventory capital you could spend on something else.
It might be tempting to hold on to high levels of inventory to make sure you don’t lose sales and to take advantage of the savings you get from buying in bulk. However, getting rid of excess inventory can also free up working capital you can invest in other areas of your business, such as advertising, increasing sales of existing lines, and developing and marketing new products and services.
Not spending money means lost customers and future sales. Freeing up cash by reducing your inventory capital levels lets you divert funds to these tasks and typically provides a source of cash flow that doesn’t come with finance charges.
Move Products Off the Shelf
The goal is to move excess goods out of the warehouse, onto your store shelves, and then out the door in the most efficient manner possible. Facilitate this process through the use of strategic product placement within your store. While this is typically applicable to brick-and-mortar stores, using a little creative thinking can also let you use this strategy for online stores.
Feature inventory items you want to clear out on your home page or on other high-traffic pages of your website. You might publish a blog post about a certain product to stimulate customer interest.
Successfully using the tactic of strategic placement requires some research on your part in regard to the areas of your store’s layout that have the highest amount of traffic, or are prime areas where customers spend lengthier periods of time.
Placing excess inventory in such areas makes it more likely to be viewed and purchased. Try drawing more attention to the items with catchy signage options labeling them as “Manager’s Choice,” “Pick of the Week,” or with a sign indicating the products were sold out, but have returned for a limited time only.
The longer it takes to move goods from your inventory, the longer your cash flow suffers. Cutting the price of products requires a delicate balancing act. Keep in the mind how much revenue your business is potentially losing by hanging onto the goods as well as your need for bottom-line profitability.
The price cut must be significant enough to encourage customers to buy it but not so steep that you end up only breaking even – or worse, losing money on the sale.
Invest in Good Inventory Tracking Techniques
How can you find out what inventory level is right for your small business? One of the best ways to avoid an overabundance of the products is to ensure thorough and careful management of your retail inventory. Consider using tried and true inventory management methods to help keep inventory levels down. Software that automatically updates whenever you buy or sell products, offering a quick and efficient tally of the goods you have on hand, can be a big help.
Whichever method you use to manage your business inventory, it’s a good idea to schedule regular inventory auditing throughout the year to monitor and maximize your inventory management program. A good online bookkeeping/accounting program enables easy inventory tracking, reports, and management and helps you put together more cost-efficient inventory replenishment orders.