Inventory levels that are constantly correct are far from a given in the modern business world. No matter much care you or your employees take in managing your stock, any number of events can cause your numbers to go awry. A few examples include: merchandise being out for repair, inter-store transfers not being properly recorded, merchandise returned by customers but not put back into stock, or merchandise being stored in an usual or infrequently used area. Despite the various threats that may make perfectly correct levels unrealistic, it is worth trying to obtain the most accurate inventory levels as possible for a number of reasons.
One significant consequence of your business having the wrong inventory levels is the impact on purchasing stock. If recorded levels are higher than actual levels, it is possible that stock could be under-ordered, meaning your business could be caught short on inventory and thus unable to service certain customer orders. This will negatively affect your customer retention and business’s reputation. If, on the other hand, recorded levels are lower than actual levels, then over-ordering is possible. This will cause your business to pay too much of the various costs associated with holding inventory, such as wages for warehouse staff, security, rental of storage space, and costs from obsolete stock. There will also be excessive capital tied up in inventory, which could be used for other, more productive purposes.
Over or under reported inventory levels will result in corresponding errors in financial reporting for your business. For example, overstated end-of-year inventory levels could result in overstated gross and net profit, meaning that your business will appear to be performing better than it actually is, and your business will pay excessive amounts of tax. Understated levels could likewise under-report profit, giving the signal to you as the manager that the business is performing worse than it really is, which could incorrectly affect your future operational or strategic decisions.
Aside from the two problems mentioned above, errors in inventory levels will spread throughout other areas of your business, multiplying the negative impact. Your sales staff will become frustrated if they are unable to close sales due to errors in stock levels. You will be unable to distinguish between warehousing staff that are performing well and deserving of reward, and those that are inefficient or losing items. If your business is large, synergies between different departments in your company will suffer, because incorrect data from your inventory department will spread to other departments when shared, such as between accounts, warehousing, and sales.
Value of Accurate Data
By contrast, when you have inventory data that you know is accurate, you can do things as a manager that is not possible with less reliable figures. You are able to spend more time ‘fine tuning’ or improving inventory-related processes like purchasing, warehouse layout, or distributing stock across different stores, because accurate data will allow you to make finer distinctions than would otherwise be possible, and also because you will have less of your time used up correcting errors. Your strategic plans will be robust because they will be based on accurate and reliable inventory, gross profit, and net profit figures. When incidents like theft occur, you will be in a better position to determine exactly when they happened, and investigate sooner.
When it comes to the accuracy of your inventory levels, don’t settle for data that is ‘just okay’. There are important benefits to having data that you are confident in, and multiple costs to your business when data is only somewhat acceptable. Modern inventory management software can greatly assist in this, by tracking all products and providing constantly updated stock levels in real-time.