Period costs relating to inventory are a necessary evil for almost any business that sells goods. Storage, insurance, security, ordering costs, shipping, and loss due to theft are to be expected. However, a small business should strategically approach these expenses. By bolstering your inventory management system with the steps below, your inventory costs can be minimized, or with the right inventory management system, eliminated entirely.
Conduct Regular Inventory Counts
Schedule repetitive inventory counts to become aware of issues that are developing. For instance, periodic inventory counts alert you to potential theft or internal control deficiencies. In addition, periodic audits alert you to damaged goods that need to be replaced. These counts may result in unfavorable findings, but they minimize inventory costs by eliminating the need to purchase last minute inventory items and pay higher shipping expenses to have the items delivered on time. In addition, being aware of what inventory is on hand raises awareness to business capacity. Without inventory counts, a small business may be forced to turn away customers because of insufficient stock.
Utilize Efficient Order Quantity
A small business should strategically plan when to submit an inventory order based on the inventory available and the forecast demand. However, it can consider placing less orders throughout the year if there are flat fees associated with placing an order. The company may end up paying more in storage costs, but placing larger orders may save on ordering costs. Utilize the economic order quantity formula to gauge the best size of an order. To use the formula, you must know the setup costs for the average order, the demand rate of your product, production costs, and the opportunity cost of other products. In addition, take advantage of software tools such as reorder alerts within QuickBooks to get automatic notifications when your reorder point has been reached.
The root of knowing how much inventory to have on hand is directly related to your business forecast. Incorrectly assessing expectations for your company results in an inaccurate amount of inventory in stock. Temper expectations and do not get emotionally involved in the forecasting process. Instead, analyze market trends, research new competitors, learn your sales trends, and objectively assess the likely outcomes. Analyze the seasonality of your company to understand the short-term implications of setting an inventory order. Make sure you have complete counts of your inventory when you perform your forecasting.
Just-in-Time Inventory Management
For small businesses that wish to almost entirely eliminate inventory costs, just-in-time management eliminates the need to incur carrying costs. Although order costs may be higher because of the timeliness of the transaction, a company utilizing JIT has little to no inventory to manage. Only companies that have strong relationships with suppliers are able to appropriately manage this inventory system. In addition, a strong communication channel between you and your customer is essential. Although inventory costs are minimized, there is greater risk of insufficiently filling a customer’s order.