Inventory control is something that all businesses need to get right, particularly as it is directly correlated to influencing business profitability. Factors such as how you source and store inventory stock and your approach to inventory control impacts profit.
Therefore, effective inventory control is vital to maximising operational efficiency and in turn, profitability. Here’s how:
Control inventory costs
The purchase and production costs of inventory are a factor in determining gross profit because gross profit is calculated by deducting the cost of goods sold (GOGS) from net sales.
The real inventory cost of stock is more than the purchase price you pay for items. It includes such things as any interest on loans to purchase the inventory stock, storage, insurance, taxes on the inventory and the opportunity cost of where the cash can be better spent rather than on items sitting in the warehouse unsold.
The result of better inventory management is faster, more informed decision-making, greater inventory accuracy and many inventory challenges are reduced or eliminated, boosting savings across the business. An overall decrease in inventory cost represents a lower COGS and as the cost of goods sold decreases a business’s profits will grow.
Beyond improved sales and operations, inventory control impacts profit through improved cashflow and reducing the need for credit, which can be difficult for many small businesses who traditionally have limited access to additional funds.
Manage inventory levels
What are the differences between fixed assets and your inventory stock? From an accounting standpoint, inventory and cash are both considered assets. Yet, many businesses think of inventory only in terms of purchasing goods in the hope of making sales.
Your inventory levels can directly affect cashflow: funds invested in surplus stock not only ties up cash but imposes carrying costs, which may then impact other expenditures, such as marketing spend and promotional activities.
In contrast, not having enough stock on hand can result in lost sales and potentially lost customers, having a decreasing effect on revenues and profitability. With better inventory control, businesses can manage stock levels to mitigate overstock and understocked situations that will considerably affect profitability.
Consider inventory turnover
Inventory turnover also affects profitability. The goods you stock should sell, and they should have a high turnover if your business profitability is to increase.
While inventory’s purpose is to be sold, the amount of profit a business achieves is largely based on how well a business manages inventory. Holding inventory stock that has a low turnover slows down sales, ties up cash, incurs costs and is at risk of damage or obsolescence. Stocking fast-moving goods boost sales levels and inventory turnover.
Proper inventory control is vital to maximising operational efficiency and profitability. When you have control of your inventory, you will be able to identify fast moving products and optimise these for greater profitability.
Beware of inventory overheads
Hidden overheads are often tied up in inventory and these overheads are another aspect of inventory that will affect profitability. One of the biggest overheads of inventory management is the manual labour employed in such tasks as counting, organising and shipping inventory stock.
Improving the efficiency of your inventory control will reduce some of these overheads. Reliable inventory management software and automation can eliminate the need for manual counting. While demand analysis can ensure you are purchasing the right products in the right amount, making handling and transportation more efficient.
By reducing overheads as much as possible, the profitability of your business will increase accordingly.
Your inventory management system is a key factor of success that needs to be implemented across all locations and channels. Inventory management software provides real-time visibility of key inventory control measures through consistent stock tracking and analysis.
Place inventory control at the forefront of your business with a single system so that all areas, from purchasing and production to sales, have real-time access to the same information, increasing productivity and profitability.
Topics: business growth, inventory control, inventory turnover, profitability