Take Inventory of Your Inventory

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Cutting back on inventory is one of the best ways for your company to save money. Here are some tips on cutting back without sacrificing customer service and revenue.

Physical Inventory

An accurate physical count is the basis of effective inventory management. Careful management of inventory will help to identify and remedy discrepancies between your physical inventory count and perpetual records. Hiring a CPA can offer an element of objectivity in counting inventory, which will minimize errors.

Inventory Ratios

Comparing your inventory costs to those of other companies in your industry is an important step in cutting back. Trade associations typically publish benchmarks for:

  • Gross margin [(revenue – cost of sales) / revenue]
  • Net profit margin (net income – revenue)
  • Days in inventory (annual revenue / average inventory x 365 days)

Striving to beat, or at least meet, industry standards is essential to the health of your company’s inventory prices.

Retailers and wholesalers who simply purchase inventory from the manufacturer have relatively simple inventory accounts. For manufacturers and construction firms, the accounts are complicated by the use of raw materials, labor, and overhead costs. Knowing where to cut inventory will depend heavily on the composition of your company’s goods. It’s often hard to cut labor costs, but suppliers may be willing to negotiate.

Inventory also brings with it carrying costs. Insurance, storage, obsolescence, and pilferage must be taken into account with cost. Negotiating a net lease for your warehouse, installing anti-theft devices, and choosing less expensive insurance coverage are all ways to improve margins without trimming physical inventory.

Product Mix

Consumer needs should guide your product mix. Cutting back on inventory must be done with balance. Options such as negotiating a faster delivery time from suppliers or giving suppliers access to your perpetual inventory system will help to prevent lost sales from lean inventory.

The reorder point on supplies is another important metric. This is the quantity of a supply that triggers a new order. This is a function of both your volume and the purchase order lead time. Giving suppliers access to your inventory system allows them to ship additional stock once the reorder point is met automatically.

Computing product-by-product margins will help reduce your days-in-inventory ratio. Keep products with high margins and high demand stocked, and keep less of everything else. Returning excessive supplies of slow-moving inventory to suppliers whenever possible is also helpful.

We can help

Inventory management often gets overlooked, which can cost your company greatly. We can look into the status of your inventory compared to industry benchmarks, and calculate ratios to help minimize the guesswork in inventory management. Contact us at 949-860-9902 or click here, and we will contact you.

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