To most businesses, inventory stands as the single biggest asset on their financial balance sheet. Everyone from the company stakeholders, internal and external auditors, banks and vendors all place immense importance on the inventory of a business – and for very good reason. How well a business controls its inventory will affect every other facet of the business, from customer service to profitability. Poor stock management leads businesses into a logistical and financial dilemma. This is characterized by higher rates of inefficiency, decreased productivity, elevated operating costs, shored up working capital, significant drops in meeting customer service targets and therefore an embattled bottom line.
Are you asking the right question?
The question any savvy business owners should ask themselves is not ‘Will my stock control strategy affect my firm’s performance?’ but rather ‘To what extent will the stock control strategy I utilize impact on my business from a performance as well as profitability standpoint?’
Poor inventory management is one of the four major causes of business failure among small businesses. Perhaps more startling, is that, according to the US Small Business Administration, 46 percent of these small businesses (a business with between 11 to 499 employees) do not have any sufficient inventory management system capable of tracking goods in place.
When one considers just how stock management impacts a business’ performance it soon becomes clear why an inventory management software system is an essential component of any small business hoping to operate optimally and have the capacity to scale and grow.
Why accurate inventory is all-important
When a business does not have the ability to track, trace and account for each item of stock moving through its supply chain in real-time, discrepancies between reported and actual stock levels can occur.
The moment stock levels become inaccurate every function that contributes to successful business operation falls out of alignment.
- Forecasting: Demand forecasting is notoriously challenging, however a business that is working off flawed data and an inaccurate perception of its real stock situation is bound to develop forecasts which are nowhere near accurate. The result will be an over replenishment of stock, which in turn leads to bloated warehouses, raised labor, storage and insurance costs and a higher rate of obsolescence, damage, tampering and theft. What’s worse, having surplus inventory ties up cash flow, which to a small business is absolutely essential for survival and growth.
- Understock: If a business has no reliable way to accurately gauge the level of its inventory on hand it could end up assuming it has enough stock to replenish demand. If this is not the case, as demand surges, supply is exhausted and every business’ worst nightmare becomes a reality – being unable to fulfil customer demand and meet customer service targets. As well as lost revenue through missed sales, understock will lead valued customers to move to a competitor and damage the company reputation. For a small business in the first few years of business, this is often enough to drive the business into bankruptcy.
- Decreased productivity and efficiency: Poor stock management, especially with regards to warehousing and distribution, significantly raises the rate of inefficiency and poor productivity. Without an integrated system that provides the ability to instantly locate a specific item of inventory, a huge amount of employee hours are wasted. By employees having to search for misplaced, poorly labeled and stored, or simply non-existent items of stock you are significantly adding to the costs of the business.
- Inaccurate financial reporting: From a legal and financial standpoint, the ramifications of reporting inaccurate inventory values can also contribute to having to pay higher taxes. How a business chooses to value and report its inventory has a direct correlation to the net profit reported for the year, and hence the amount in taxes it has to pay. Inaccurate financial reporting can also have a long lasting impact on the business’ ability to borrow from banks or other vendors down the line. What’s more, in the event of an audit, it is imperative that a business’ inventory records match with the physical stock count.
Stock control affects virtually every facet of business operations. Stock management, when well executed, leads to stock level accuracy, effective demand forecasting, optimal replenishment cycles, accurate financial reporting, lower operating costs and achieving higher customer service targets.
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.