03 August, 2021

5 Ways Bad Inventory Management Costs You

How much does inadequate inventory management cost a business? No matter what or how you sell, bad inventory management can hurt your cash flow and mess with your bottom line.

Generally speaking, businesses treat inventory as a current asset. They assume that stock can be quickly sold and turned into cash. As such, inventory is a significant asset on many companies’ balance sheets. Estimates vary, but for public companies, inventory can account for 15% of total assets. That can be as much as 30% to 40%, however, for companies with relatively fewer fixed assets.

Businesses must convert inventory to cash as quickly as possible. Quick turnover provides the cash to cover short-term expenses, but it does something else.

Right-Size Inventory, Better Cash Flow

The less time inventory spends on the shelf or in the warehouse, the more cash you’ll have in the long run.

That’s because it costs money to hold stock for the employees, utilities, storage and shelf space, and depreciation that accrues as a product waits to move.

Bad inventory management simply means you don’t have the tools and processes in place to keep optimal stock levels. Businesses simply make more cash without the need to carry excess stock when they have ways to monitor and manage stock, sales, and replenishment to carry the right amount of inventory.

How Bad Inventory Management Messes You Up

Many businesses use spreadsheets to track inventor. It’s an improvement over handwritten ledgers. But without real-time data, a business will run into some bad inventory outcomes:

  1. Higher Holding Costs. As mentioned above, the longer you hold inventory, the higher your costs. Thus, without good inventory management and information, a business may stock up on too much of a product, erode cash flow and risk holding dead stock that has become obsolete.
  2. Missed Sales. While holding too much stock carries risk, having too little stock will lose you sales. A business that relies on static inventory tracking will not have data on hand to know a product is selling better than expected. Real-time data and reports help companies see when it’s time to replenish or increase stock levels of hot-selling items.
  3. Inefficient Replenishment. To reiterate the second point, a lack of inventory insight means a business won’t know if it’s time to restock an item.
  4. Uncertain Cash Flow. This is what it all comes down to: good inventory management gets you closer to optimum inventory levels to free up cash in the short term to meet other expenses and short-term debt obligations. Plus, if you are replenishing inventory in close parallel to selling it, you are bringing in cash at a similar rate to what you pay out in for inventory.
  5. Too Much Real Estate. Finally, carrying the right amount of inventory reduces the need to own or lease excess space. Good inventory means optimizing retail space and economizing warehouse space.

In summary, companies should use a system with real-time and historic stock levels and sales data to optimize inventory and liberate cash flow.

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