Inventory management refers to the process of organizing and managing stock throughout the supply chain.
Effective inventory management plays a significant role in providing enough stock for your business to meet customer demand. However, ineffective inventory management will lead to a shortage of goods that impedes cash flow or a superfluous inventory that wastes money.
When it comes to running a business, it is vital for you to understand that inventory management benefits your company in many ways:
1. Prevent spoilage
This is particularly important for business owners who sell products that have an expiry date, like food or makeup. This is because there is an exceptionally high probability that the products will turn bad if you don’t sell them in time. Having effective inventory management helps you avoid unnecessary spoilage, thus reducing your potential losses.
2. Prevent deadstock
It might sound like the first point, but they are slightly different. Deadstock describes products that can no longer be sold but have not necessarily expired. For instance, they could have gone out of season, out of style, or otherwise become irrelevant to consumers.
3. Cut storage costs
Good inventory management can save you plenty of unnecessary warehousing costs. The cost of warehousing is variable, which means it is determined by how many products you’re storing. Storing too many products at once will increase the warehousing costs if the market turns sour because the products will be difficult to sell. Manage your inventory in a way that prevents a surfeit of stock.
4. Enhance cash flow
As indicated earlier in the introduction, good inventory management not only cuts costs but also improves your business’s cash flow if the customer demand is met.
To conceptualize it, think about inventory as a product that you have already spent money on, and then you’re going to sell it for cash (profit). The thing is, while it’s sitting in your warehouse, it’s definitely not making you cash; to get the cash, you have to sell it.
So, inventory management and cash flow management are two inseparable elements when it comes to growing your business. By controlling how much you can sell, inventory affects your sales; by controlling what you need to buy, it affects your expenses. Both of these factors determine how much cash you have on hand.
In other words, good inventory management leads to good cash flow management. Other than ensuring you don’t lose sales, it also enables you to plan in advance for stocking up by ensuring you have sufficient cash on hand.
5. Optimize order fulfilment
Orders can be fulfilled easily if you have good inventory management. For instance, you can use tactics like inventory distribution, which means using fulfilment centres that are closer to your customer’s shipping address, so if they order a product online, the order is shipped and delivered faster. Eventually, it saves you time and shipping fees, and your customers are more likely to be satisfied and buy from you next time.
In a nutshell
These are the five reasons why you should never neglect inventory management when running a business. Inventory management is indeed essential for business growth. However, it is nothing if you fail to manage your business finance and accounting. Every essential element interrelates with each other.
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