Inventory management and business finances

Many new business owners are surprised to find out how important inventory management is to the state of their business finances. The reality is that how well you mange your inventory will directly affect both your cash flow and ultimately the profitability of your business. Proper inventory management will be crucial to the long term success of your business; however it can be a complex process. For example-If a business is carrying to much inventory they run the risk that it will age out and they won't be able to sell it. Conversely, if a business does not have enough inventory then they are running the risk of having stock outs and losing the satisfaction of their target market. Either of these scenarios can be highly detrimental to the finances of your business which makes inventory management so crucial. Here is what you need to know about inventory management and business finances-

- Don't carry to much inventory-This is a problem that is common among smaller businesses that are not yet experienced enough in inventory management. You need to make sure that your inventory is a vital and working asset for your business. If you are holding onto to much inventory then you are simply tying up cash that could be used somewhere else. Do not allow yourself to make the mistake of stocking up on a particular kind of inventory just because you can get it for a good price. If you want to maximize the profitability of your company then your only focus should be on moving your inventory as fast as you can.
- Only hold inventory that has a positive rate of return-Remember that your inventory is just like cash. Any money that you have spent on inventory is money that you could have spent on something else. This means that it is critical that you only have inventory that you can sell fast and for the best price possible. This can be a tricky process to decide this since it is not always possible to know for sure that your inventory will sell quickly. However, with time and experience many business owners are able to determine what inventory will work best for them. The bottom line is that in order to maximize the return on your inventory you need to buy carefully and conservatively so that you are not left with items that are hanging around your warehouse or on the shelves.
- Carefully consider slow moving inventory-Slow moving inventory is a big problem when it comes to managing your inventory. Keep in mind that slow moving inventory is not dead inventory but rather items where the sales are very slow. Business owners should be constantly be scrutinizing their inventory for slow moving items. The problem with these items is that they are tying up your cash for very little return. Sometimes it can be helpful to look at what the competition is selling and then take a look at your inventory. Once you identify slow moving items take the necessary steps to get rid of it.
- Cut out any dead inventory-The final step in inventory management is purging dead inventory. Many business owners for some reason are reluctant to part with dead inventory. They hold onto the false hope that at some point they will be able to get their money out. This rarely happens. Experienced business owners understand that once dead inventory has been identified the best thing to do is mark it down for a quick sale. Failing that you may want to consider donating it to charity for the tax write off.