Inventory in any business forms the foundation of your operations, but that does not mean you keep piling it up. You have to implement some controls on what should be stored and in what volume. Inventory which lies unsold only adds to the business losses. The return policies of most merchandise are possible only within a certain timeframe. Most manufacturers replace damaged merchandise, but if your stocks have been lying unsold for long, even the manufacturers will not accept them. This makes it very imperative to monitor your inventory regularly. You have to place orders that suffice to meet your client’s requirements. You have to analyse fast-moving products to enable you to place additional stocks of that category only. Festive seasons always impact sales positively, but there too, you have to place a realistic amount of stocks in inventory. Inventory management plays a very vital role in understanding and maintaining the correct amount of stocks at any given point of time in a business cycle.
Did you know? The largest retailer in the world, Walmart, manages an average inventory valued at Rs. 3200 crores?
What is Inventory Management?
Inventory management aids businesses in determining which goods to order and when to order them. It keeps track of merchandise from purchase to sale. The practice monitors and reacts to trends to guarantee that there is always enough stock to satisfy client orders and that shortages are detected early.
Inventory becomes revenue if it is sold, and inventory ties up cash before it sells, despite the fact that it is reported as an asset on the balance sheet. As a result, having too much inventory costs money and lowers cash flow.
Inventory turnover is one indicator of good inventory management. Inventory turnover is an accounting metric that shows how frequently stock is sold over time. A company does not want to have more inventory than it can sell. Deadstock, or unsold inventory, can result from low inventory turnover.
Also Read: Know the Basics of Managerial Accounting
Benefits and Importance of Inventory Management
You can attribute a successful product cycle to accurate inventory management. It gives you an insight into the supply change enabling you to make appropriate and timely changes in the placement of orders. A business experiences almost negligible inventory errors. Given below are the various benefits of implementing an electronic inventory management system in your business.
- Accuracy of stock – An inventory management software system offers optimal support to your employees. It provides them with the correct details on the available stocks and which category of stocks need to be replenished. It helps you understand which stocks have a good turnover and which stocks have been lying unsold for a long. You get clarity on products that are overstocked and those in demand but need to be replenished.
- Reduces unnecessary costs – Most businesses store their goods in rented warehouses. An excess of inventory or unsold inventory leads to increased storage costs as well as losses as the goods are lying unsold. Inventory management provides you with organised details about the entire inventory. It helps you to understand when to replenish a certain variety of merchandise and by what margin should the increment be made. You get clarity on slow-moving and unsold products. This makes you alert in placing orders, helps you to reduce unsold stocks, create more storage space, reduce losses, and decrease redundant expenses. Moreover, an inventory management system helps lower insurance costs by informing you about excess inventory. You can then dispose of it either through discounts or return it to the manufacturers if they agree to the same.
- Transparent and detailed information – Effective inventory management gives you complete details on the receipt of stocks, packaging and shipping of other stocks and the exact date of deliveries.
- Increased automation – Automation makes your business less dependent on manual labour. There is little scope for human error as automation makes the entire process flawless.
- More amicable relationships with manufacturers and wholesale dealers – Once you get an understanding of the flow of goods, you can use that to your advantage. You can strike better deals with manufacturers as well as other suppliers and avail of bigger discounts on the placement of large volumes of goods.
- Timely deliveries – An organised inventory management system helps you understand merchandise which enjoys a consistent demand. This helps you place timely orders and meet all your clients’ demands without giving them an excuse to complain. This helps retain existing customers and also helps increase the goodwill of your business. Customer satisfaction increases their trust and this, in turn, leads to an increase in your customer base.
Inventory management systems play a very important role in the protection of inventory data as well. Some of the key areas where inventory management plays a highly significant role are as follows:
- Secures inventory data – Not everyone is allowed access to your inventory details. It is limited to the usage of key personnel who manage the processes. This protects the details of your inventory and the internal operations and helps maintain privacy from outsiders, including the vendors. This concentrated access protects your entire inventory system from cyber attacks and other miscreants in the industry.
- Enables visibility across the product cycle – A digitised system helps the inventory management personnel resort to serial numbers in order to locate the merchandise by both locations as well as the date.
- Enables seamless tracking across storage facilities – A manual tracking of, e.g., 20,000 stock-keeping units is an impossible track. An inventory management system facilitates the same in a timely and efficient manner.
- Cumulative inventory details across storage facilities – It gives you absolute and exact details of the various stock levels available at retail outlets, with your suppliers, and at your distribution outlets, in addition to the availability in your warehouse(s).
Also Read: 3 Golden Rules of Accounting Explained with Best Examples
Why is Inventory Management Important?
There are multiple reasons underlying the importance of inventory management. Some of these are listed below:
- Insightful details on inventory – An inventory management system gives you a realistic status of your entire business product cycle. These details play an important role in scaling your business operations, improving the operations cycle and making timely deliveries.
- In the case of storage across a couple of warehouses, you can centralise your data. With features like barcode scanning, you will be able to monitor all the operations easily, and this will help you plan your business more efficiently.
- Timely fulfilment of orders – An inventory management system aids in the speedy fulfilment of numerous customer orders. This ensures your business a steady flow of repeat orders as well as attracts new clients because of the good publicity spread by happy customers.
- Time-effective – Inventory systems with their organised mechanisms manage your inventory accurately. This allows you the freedom of more time to focus on other aspects of the business, e.g., expansion and setting up franchisees.
- Helps you to maintain a healthy cash flow – Small-scale businesses cannot afford to stock large volumes of inventory, and they have limited financial constraints. An inventory management system helps you to control your stock storage. It helps you to place orders of fast-moving and in-demand goods in a timely manner. You invest your revenue resources in accordance with such details. This prevents you from investing in large volumes of inventory. The additional money can be used to enhance other key aspects of your business.
- Increased profits – A business without an inventory management monitoring system is vulnerable to thefts. If you implement an inventory monitoring system, it protects your inventory.
- Better sales strategies – With details on real-time data in your storage facilities or warehouses, you can improve your sales strategies to fulfil client requirements more effectively.
- Competitive advantage – Proper management of your inventory is a competitive advantage that enhances the performance of your business.
- Seasonal management of inventory – Some products are seasonal. An inventory management system will help you manage seasonal inventory without experiencing any wastages. It facilitates the placement of such products at the right time in accordance with the seasonal demand.
- Optimal efficiency of resources – Real-time data helps you understand what stocks need to be avoided in their entirety. It also enables you to understand the merchandise which contributes the most towards profits. You can make appropriate investments in such stocks. Your additional finance reserves can be used in the diversification of your business.
- Facilitates fulfilment of changes in demand – An organised inventory management system helps you tide over the fulfilment in the event of an unexpected change in demand for some products. You are able to manage this without compromising on quality or the clients’ experiences.
Also Read: Learn About Accounting Principles and Concepts
Conclusion:
Every business operates on a well-organised inventory system. Manual management is not only difficult but prone to various errors. This can impact a business negatively. An inventory management system is a one-stop solution to organise your inventory flawlessly and furnish you with timely details on the existing stocks, requirements and shipments. You can get a bird’s eye view of your inventories across dealers, suppliers, warehouses as well as vendors. Follow Legal Tree for the latest updates, news blogs, and articles related to micro, small and medium businesses (MSMEs), business tips, income tax, GST, salary, and accounting.