Starting a small business can be an exciting time for the owners, who usually have a solid understanding of how to build and promote a product and how to reach their customer base.
However, a key and often overlooked component to business success is understanding key inventory metrics. Managing your inventory correctly can greatly enhance your likelihood of success, and actively monitoring inventory metrics will help you to ensure processes are running smoothly and efficiently.
The following article outlines a few of the most important inventory metrics, exploring how and why it is so vital that business owners manage these metrics carefully.
Accurate Inventory Levels
Keeping accurate inventory records is essential to the success of any business. When businesses start out, the excitement of an entrepreneurial adventure can distract from the importance of tasks like these.
By keeping an accurate record of your inventory, you will be able to oversee your stock from the raw material stage all the way up to the delivery or collection by the customer.
Tracking your inventory levels will help you to determine how much inventory you should have on hand, calculate seasonality, and will help you to understand important aspects of your processes. Regular inventory counts are a must, especially for fast-moving items.
Downloading inventory software is a reliable and efficient method for keeping accurate inventory records. Good quality inventory software will enable you to track stock from start to finish, and to trace items in real-time. Inventory software provides you with instant access to specific details about inventory at the click of a button.
While it may seem self-evident, not all business owners keep track of their gross margin, and some even fail to understand what it actually is.
Your gross margin is calculated as your company’s total sales revenue minus the cost of goods sold, divided by the total sales revenue and expressed as a percentage. Understanding exactly what this means is key to maintaining solid finances and will enable you to identify any monetary changes that may be necessary.
The cycle time clock starts when work begins on a request and ends when the item is ready for delivery or collection. Essentially, the cycle time means the time it takes from when an order is first issued until it is completed. Cycle times can apply to various types of orders, including customer orders, purchase orders, manufacture orders, and more. You can break this down into smaller cycles, such as the time it takes to process a purchase order to detail a more precise analysis.
Understanding your businesses cycle times is a key component to your company’s efficiency, productivity and of course, overall success. By understanding how long each process takes, you will be better equipped to make any changes as necessary.
Understanding Inventory Turnover
The key to inventory turnover is to use the cost of goods sold – meaning what was paid for the material, not the price at which the material was sold. The inventory turnover ratio tracks how quickly you’re replacing inventory.
Business owners need to prevent storing too much inventory in a warehouse. The higher the inventory turnover, the better the business uses its inventory assets. A great way to do this is by downloading inventory software that will help you track inventory. This will help you to dramatically increase profitability and accurately track inventory without extra expense.