These days, I understand just how important solid inventory management is. Inventory is a placeholder for money. You paid money for your inventory, and you’ll get that money back (and then some) when you sell it. Holding inventory ties up a lot of cash. That's why good inventory management is crucial for growing a company. Just like cash flow, it can make or break your business. Q1. What is inventory management? Inventory management is the act of keeping track of a company’s stocked goods and monitoring their weight, dimensions, amounts, and location. The goal of inventory management is to minimize the cost of holding inventory by helping business owners know when it’s time to replenish products, or buy more materials to manufacture them Why inventory management is important Effective inventory management is essential for ensuring a business has enough stock on hand to meet customer demand. If inventory management is not handled properly it can result in a business either losing money on potential sales that can’t be filled, or wasting money by stocking too much inventory. An inventory management system can also help you prevent a number of other mistakes: Inventory management saves you money 1. Avoid spoilage If you’re selling a product that has an expiry date, like food or makeup, there’s a very real chance it will go bad if you don’t sell it in time. Solid inventory management helps you avoid unnecessary spoilage. 2. Avoid dead stock Dead stock is stock that can no longer be sold, but not necessarily because it expired—it could have gone out of season, out of style, or otherwise become irrelevant. By managing your inventory better, you can avoid dead stock. 3. Save on storage costs Warehousing is often a variable cost, meaning it fluctuates based on how much product you’re storing. When you store too much product at once or end up with a product that’s difficult to sell, your storage costs will go up. Avoiding this will save you money. 1
Inventory management improves cash flow Not only is good inventory management more cost-efficient, it improves cash flow in other ways, too. Remember, inventory is product that you’ve likely already paid for with cash (checks and electronic transfers included) and you’re going to sell it for cash, but while it’s sitting in your warehouse it’s definitely not cash. Try paying your landlord in dog collars or iPhone cases. This is why it’s important to factor inventory into your cash flow management. Inventory directly affects sales (by dictating how much you can sell) and expenses (by dictating what you have to buy), and both of these elements factor heavily into how much cash you have on hand. In short, better inventory management leads to better cash flow management.
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