Do you know where your wallet is right now? Sure, every so often you misplace your wallet. It might end up in the pocket of a pair of jeans on the floor, but it’s safe to say that 99% of the time you know where it is. This is because wallets are our important personal assets. They hold our credit cards, cash, and valuable items. So it makes sense that we look after it. Essentially, wallets are to people what inventory is to business.
The relationship between inventory and profit
Inventory is a large asset for a business. Actually, from an accounting perspective, inventory and cash are both assets. Cash is easier to identify, but inventory stock is something you have invested in and will be sold on to earn the company money.
A business relies on inventory to be sold to consumers in order to make money. However, the transactional purchase is not the only way a business makes money. Interestingly, profit is derived from how well inventory stock is managed throughout the inventory management journey. This starts at the beginning with the purchase of inventory, inventory control at the warehouse, as well as delivering goods to customers. Lastly, other components of the inventory stock journey such as customer service and the returns process play an integral role in profits.
If you look after your inventory, it will look after your business. Cashflow will improve when inventory management is streamlined. Here are a few ways that your business can grow your profits through better inventory management tactics.
Your inventory levels are directly connected to your cashflow. If your company has minimal cashflow, you will feel the pinch if your funds are tied up in inventory that you’re not currently turning over.
For instance, if you have a large inventory stock of winter coats in summer, this could be bringing you down. Since you’re not selling as many, if any, winter coats in the summer accounting window, this will significantly impact expenditures.
If you have too much of the wrong inventory it can tie up capital and bring your profits down. Additionally, there is another tangible expense incurred by excess inventory using valuable warehouse space — the more inventory you have, the more people you’ll need to manage it and the more space you’ll need to store it.
The cost of your inventory stock
When you purchase inventory and refine it in the production process, this plays a big role in the health of your gross profit. Since gross profit is calculated by taking out the costs of goods sold from the overall sales, it’s clear that the cost of inventory will affect this result. Essentially, the cheaper the inventory cost, the lower the cost of goods sold. Therefore your gross profit will increase as your costs of goods sold decreases.
Minimise low turnover sales
Minimising dead stock or stocks that have low turnover sales impacts profitability. Keep stocks on the shelves that have high demand and quick turnover. Look at sales patterns and data to help determine demand. This will help you minimise the inventory in your warehouse with low turnover.
Article by Melanie Chan in collaboration with our team of Unleashed Software inventory and business specialists. Melanie has been writing about inventory management for the past three years. When not writing about inventory management, you can find her eating her way through Auckland.