How to Start Reducing Your Inventory
Inventory is a large problem for many businesses. You need to keep enough on stock to offer your customers timely product delivery but keeping too much on stock will cause you to end up with dead inventory and lost money. Tying up too much money into your inventory can sink your company in a hurry and it requires a lot of smart marketing and money management to work your way out of a pit like this. Inventory is the largest asset you likely have on your balance sheet and it is one that you do need to work with and to cut the expenses so it's not sucking everything out of your cash reserves.
Your company's inventory is directly related to your profitability. You have a significant amount of cash that is tied up in inventory in order to purchase and possess it and until the customers buy it, you are losing money. Excess inventory will end up causing you to have dead inventory to the point that you have to toss the items and write them off as a loss. This will increase your cost and will then cause you to raise prices, which can kill you as far as marketing goes as you won't be able to be nearly as competitive.
So what are the real costs of your inventory? They are as follows:
- Money - the cost of money is the first thing you need to consider. It is the cost of capital or the opportunity cost that your company has. You can make this money back with the right marketing and know-how but this is a big cost for many companies. In some cases it can impact 25% or more of your cash reserves, which can really ruin your company in a hurry as you have nothing to fall back on when times are rough.
- Obsolesce - what happens if you order all this inventory and it never gets sold? The risk of it never being sold or it being useable is a big part of owning inventory and it can sink your company as well. The larger the inventory, the greater the risk. You need to look at customer preferences along with changing times to see what you can do to avoid having your inventory become obsolete.
- Shrinkage - this is the part of your inventory you own that you will never sell. You cannot sell it because it has become damaged or spoiled. The longer you own the inventory, the greater the risk of shrinkage. Re-thinking where your inventory is stored and how it is stored can help to reduce shrinkage problems.
- Quality - what about rework? You may have inventory that looks good but cannot be sold because it is damaged and needs to be reworked. Quality of the product is another cost to your inventory.
- Price - holding onto a product decreases its value and you cannot expect to charge customers more money for a product in the future when that product has sat around for 2 years or longer.
- Insurance - how much are you paying to insure your inventory from theft and damage?
- Space - how much are you paying out each month just to hold your inventory?
Now that you can see a breakdown of all the various costs of your inventory it will be much easier for you to get started on cutting down a lot of the inventory costs. Start by implementing a good tracking system and using a system the watches sales to help you predict how much inventory you need to actually carry.