Small business tips avoiding excess inventory

Posted: 02/09/2007--25/11/2008 || Rate this Article: 3 || Views|| Sign In || Register ||Hello Guest

One of the biggest mistakes many small businesses make is tying up capital in excess inventory. Plenty of major cash flows problems are the result of having too much inventory or simply the wrong type of inventory. Having too much of a regularly sold item on hand is typically the result of not accurately forecasting future demand. If your prediction for future demand is too high, you end up tying up much needed cash flow into unneeded inventory.

Sometimes, excess inventory may also be the result of underestimating forecasts. If you underestimate the sales volume of a product and consumer demand results in sellout, too many business owners panic and override their own reordering standards resulting in a larger than necessary supply. Avoiding excess inventory is especially important for businesses that offer seasonal products, which include home accessories, clothing and holiday or gift items. Since these types of products have a shorter shelf life, they are typically hard to sell once they are no longer seasonable or fashionable.

Ask yourself these questions: Do I have old inventory that needs to be disposed? Am I consistently checking delivery records against invoices to ensure that Im only being charged for what I receive? Do I know exactly what the profit is on each item I sell? If you cant answer these questions with great confidence, then its time to review how youre handling your inventory and take measures to ensure that you dont have hundreds, or even thousands, of dollars tucked away in storage or on the backs of shelves that is costing you money because it isnt being sold or dealt with.

Here are some important considerations in avoiding excess inventory:

1. Utilize consistent guidelines for reordering supplies and merchandise to prevent excess inventory. Keep all employees on the same page, so everyone knows when the time is right to reorder.

2. Verify profit margins on all of your business products. If youre losing money or barely making a profit, reconsider these items in your inventory.

3. Consider excess inventory as any product over the quantity necessary to meet the demands of your customers before being restocked. This applies to not just products that can be considered dead stock -- which hasnt sold in the last few months -- but also includes regularly sold items that you have larger than necessary quantities on hand.

4. Keep sales forecasts as accurate as possible. Review your sales figures closely each month, or even weekly if you have the time and staff. Compare forecasts with sales from the same month of the previous year, unless the item is new. If your business is relatively new, you will have to rely on your business plan to determine inventory, but be cautious to avoid excess.

5. When determining on-hand stock, also consider the lead time of an item, which is the time it takes from reordering to receiving the merchandise.

Excess inventory costs money and reduces your business liquidity. If you have excess inventory, youre likely paying increased insurance for that merchandise, debt service for any loans used to obtain the inventory, additional personal property taxes on the unsold inventory not to mention overhead to deal with or simply store the merchandise. It has been estimated that it can cost a business anywhere from 20 to 30 percent of the original inventory investment simply to keep the product on hand and maintain it. It also takes up space that could be used for more profitable merchandise.

While you could reduce the price of excess inventory in order to sell it quickly, this would also reduce your return on your investment and your ability to price competitively. Some business owners may also try to rebalance stock by not reordering or by being overly cautious when reordering in the future. This is also a mistake as under ordering puts you at risk for an inventory shortage. If theres no inventory to sell, youre losing money.

Instead, try to establish a realistic safety margin. Know what you have on hand. Order what you know you can sell in a realistic time frame. The time it takes to prevent excess inventory is well worth it when it means you have more cash flow to make your business more profitable.