The importance of inventory management cannot be over-emphasized. Every time I ask a business owner how much volume they sold last month or how much they have sold this month, they always answer me in monetary terms, which is for those who even know. Some of them use the word “like” or “about” before giving me the monetary value of how much they have sold. My next statement always throws them off guard – “I doubt your business is sustainable”.
As a business owner, you need to be able to know how much stock you have sold or be able to pull out a report that gives that information. Let’s start today with two important definitions, and I’ll keep the definitions simple.
What is Inventory?
Inventory can be defined as stocks that businesses hold with the aim of converting to revenue. Inventory can be in the form of raw materials, components and finished goods.
Meaning of Inventory Management
Inventory Management is the process of ordering the right inventory amount in order to fulfill all customer orders.
Let’s paint a few scenarios;
1. Customer A walks into a store and wants to buy a particular item B. Item B is out of stock so customer A has to go elsewhere to buy it. Item B takes about 2-3 weeks from day of ordering to come in, within that 2-3 weeks, about 50 customers have walked in to buy item B. The store loses the opportunity to make revenue on item B, because they did not have item B in stock.
2. Business owner orders 100 item C in a month but can only sell 20 of item C in a month. Business owner has bought too much stock but is also tying up cash that could be used in other aspects of the business. Business owner might end up selling item C at a discounted price in order to recoup their cash if item C is going out of season, or item C is perishable or sometimes business owner just needs quick cash so decides to sell item C at a discount.
3. Business owner hires sales assistant D. Sales assistant D knows that there is no proper record of inventory, so sales assistant D helps herself to business owner’s inventory by selling and pocketing the revenue.
4. Event planner and decorator spends so much money on buying decorations and equipment but never counts her inventory. Workers help themselves by taking decorations and equipment every now and then and can eventually start their own business. Event planner has to keep buying new equipment.
These are all examples of what I have come across having worked with a lot of small businesses. Each scenario ends up in loss of revenue and in a lot of cases in Nigeria, it has ruined the business and led to its shut down.
While scenario 1 and 2 does not enable fraud, 3 and 4 enables fraud within a business. But all four scenarios are due to a lack of having a proper inventory management process in place.
As a business you need to be able to at all times have a report that tells you how much stock you have, be it in raw materials or finished goods.
You should also be able to tell how much of a particular stock you sell on average each week or month, this would allow you to be able to order correctly and avoid tying up cash or having to sell at a discount and lose revenue in the process.
Inventory Management System
Having a system in place to record your inventory and sales is very important. For inventory, an excel sheet would do for very small businesses. For medium businesses, get a software that can help you track inventory.
Importance of Inventory Management
Some of the importance of inventory management are:
- Doing regular stock takes is very key to inventory control. I cannot over emphasize the importance of having a point of sales system linked to your inventory control system.
- Fraud can be controlled and mitigated once your workers know there is a process in place. Also make sure that there are clear segregation of duties and check points around your inventory control to avoid collusion among workers.
- Having a proper inventory management in place is a key revenue driver. For some of the businesses I have worked with, putting this in place has helped them go from making losses to making profit.