Inventory Management tips

Why and how to implement an inventory management system

Inventory is one of the greatest assets of any business, especially one whose livelihood is closely tied to the sale of goods, such as distribution companies. The success of these businesses relies on their inventory management. That's why it has to be well-planned and executed.

If you think that the goal of good inventory management is to find your products easier, think again. Not only does an inventory management system allow you to place your products strategically, its primary function is to maximize your productivity so that you can save a great deal of time and most of all, money. Read on to discover how and why!

Inventory management is serious business

Not implementing inventory management processes could have considerable consequences on your fund entries and disbursements and on the smooth operation of your business in general. By not strictly monitoring your stocks, you could make the following two mistakes:

  1. Overstocking: If you “overstock”, you needlessly spend a large amount of money and risk losing certain perishable goods or goods that become obsolete when the season is over.
  2. Understocking: Understocking merchandise can cause you to lose sales and even loyal clients, which in turn leads to lost revenues.

What you could gain

Effective inventory management limits your storage costs, improves your liquidity management and prevents fraud (how can you identify theft if you are unaware of your quantities?).

Your ability to manage your inventory efficiently also affects the quality of your customer service and your capacity to build customer loyalty. By making sure that you always have the appropriate quantities in stock, you can meet demand and avoid frustrating your customers, and you don't pay additional storage costs and you don't risk losing products.

What are some of the ways that you can manage your inventory?

There is more than one way to approach inventory management:

  • Managing with an Excel file. For a very small business with few goods to manage, this method can work for a certain time. However, this method takes a lot of time and comes with a substantial risk of errors. Mistakes made in Excel are difficult to trace and can affect your decision-making and your results. These are not problems that a growing business wants to be burdened with.
  • When the time comes to choose an application to manage your inventory, the more automated your system is, the better. Managing with a specialized application allows you to automate a number of processes, thereby limiting manual data entry which could lead to mistakes. Ideally, you should find an inventory management solution which connects to and “talks” to your other management applications to simplify your processes, such as your accounting software for instance.

Accounting your inventory

If you opt for specialized software, you have to consider the inventory accounting system that best meets your needs: periodic inventory or perpetual inventory.

Periodic inventory

Inventory update

Inventory is updated periodically, generally at the end of a period or a fiscal year.

Benefits

Periodic inventory systems are a more affordable option for growing businesses. It is also an easy and more flexible method which allows adjustments to be made until the end of the period or the fiscal year.

Restrictions

Quantities in stock are not updated in real time; you have to wait until the end of the period or the fiscal year to obtain the exact quantities.

Also, with periodic inventory the cost of goods sold is only known at the end of the period.

Perpetual inventory

Inventory update

Inventory is updated with entries and sales of stocks (real time).

Benefits

This system allows you to know the exact quantify of goods in stock at any time, and simplifies analyses and decision-making.

Also, the income statement with perpetual inventory presents the cost of goods sold from the time of the sale. The results are therefore always up-to-date, contrary to periodic inventory.

Restrictions

Transactions must be processed following the movement of goods (reception and sale) in order to have the real costs on hand at all times.

This management method is also less flexible and adjustments cannot be made as easily as with periodic inventory.

An effort that's worth the trouble

Yes, implementing an inventory management system for the first time or replacing your Excel file with a real application will require an effort on your part. But good inventory management practices are vital to ensuring the sustainability of your business and to get a good overview of its financial situation. This overview is what allows you to make better decisions and foster your growth.

About Acomba

As developers of accounting and management software, each day we help over 40,000 Canadian SMBs manage the essential aspects of their operations.

Whether you are starting up or growing rapidly, we want to work with you by providing you with solutions adapted to your reality, which will help you get the most from your entrepreneurial project.

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