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All about inventory management

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Inventory management is an integral part of the finances of your business. How you choose to manage your inventory will directly affect both your profit, and your cash flow. For any company that is engaged in selling a product, effective inventory management will be crucial to their success. Balancing the right amount of inventory can be a tricky process. If a company is holding on to large amounts of inventory they run the risk of it getting to old and then being unable to sell it. If a business does not have enough inventory then they are risking having stock outs and losing the good will of their customers. Either situation can create serious business finance problem. In order to avoid these types of problems here is what you need to know about inventory management-

  • Make sure that your inventory has a positive rate of return-While this may seem like common sense advice, in reality it is much more. When you spend money buying inventory you are tying up money, that could be used somewhere else. This means that it is crucial that you buy inventory that can sell quickly, and for a premium price. Inventory is about risk, since you don't know if you are going to be able to sell it. This means that the longer inventory stays in the warehouse, or the shelves, the more money you are losing. You need to focus on buying inventory conservatively and carefully, in order to make sure that you are maximizing your inventory investment.
  • Don't accumulate inventory-Many small business often find themselves struggling under the weight of having to much inventory. If you are carrying to much inventory, you are carrying money that cannot be working for you. You should never be tempted to stock up on something, just because it is a good deal. You want to be able to move your inventory as fast as possible, in order to maximize your profit margin.
  • Get rid of dead inventory-Many times' business owners are reluctant to get rid of dead inventory. They hang onto with the false hope that they will be able to sell it at a profit, at some point. If you have inventory that has been sitting, for an extended period of time, then you need to take steps to get rid of it. Savvy business owners will mark down this type of inventory, for a quick sale. If you have inventory that you consider unsellable, then check with your distributor to see if they will take it back, for credit. If all else fails donate it to charity, since it can provide your business with a tax deduction.
  • Look closely at slow moving inventory-One of more serious problems with inventory management, has to do with slow moving inventory. While this inventory is not considered "dead" it may be moving that way, because of slow sales. Now is the time to capitalize on this stage of the product life cycle. While it can be hard to identify exactly what these products are, business owners should constantly be looking for them. The bottom line is that slow moving inventory seriously ties up your cash. It can also create a negative impact on your cash flow and profitability. Your investors may also be concerned since it lowers a return on equity. Sometimes taking a look at your closest competitors, can help you to determine what is really slow moving and what inventory is just being affected, by the current market condition. Once you have identified slow moving inventory, then take proactive steps to get rid of it. This will only help to improve your inventory management, and in turn your business finances.
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