If you run a business, you probably manage your cash very carefully. But what about your inventory? It's almost as valuable as cash, but does it get the attention that it deserves?
You might think of inventory as the items sitting on your shelves, but inventory is actually a process.
For a manufacturing business, the process begins with the purchase of raw materials, and it moves through production and sale. For other companies, the inventory process begins with a purchase and ends with a sale. In every type of business, inventory requires careful management.
* You must have enough inventory to support your business, as well as to handle sudden or unexpected customer demand. But you should avoid excessive inventory, which can tie up cash and shelf space, require extra security and warehouse personnel, increase insurance costs, and trigger additional borrowing.
* You must have up-to-date information. You need to know what's in stock, how quickly your inventory turns over, and all the costs associated with carrying inventory. At any given time, you should also know which items are selling and which aren't. In effect, you need an aging of your inventory, similar to the aging of your receivables.
* You should know how well your customers are being served, which is ultimately the most important function of any inventory system. For example, what percentage of your orders are shipped on time? How long does it take to fill back orders? What is the ratio of customer complaints to shipped orders?
For example, by installing a simple, low-cost inventory control system for a small business client, we were able to reduce their inventory by over 50%, freeing up substantial capital. At the same time, out-of-stocks, that were costing the company in lost sales, were reduced by over 30%. Proper inventory control systems can simultaneously increase sales and reduce costs by assuring that you have the right items in stock.
An effective inventory system is one of your best business investments, but it isn't a do-it-yourself project. Please give us a call for assistance in improving your inventory control system.
© Copyright 2000 Raymond S. Kulzick. All rights reserved. 000608.
This publication provides business, financial planning, and/or tax information to our clients. All material is for general information only and should not be acted upon without seeking appropriate professional assistance.