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.
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.
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:
In summary, companies should use a system with real-time and historic stock levels and sales data to optimize inventory and liberate cash flow.
Product companies have to innovate quickly in the coronavirus era. With increases in online shopping and demand for click-and-collect, retailers and wholesalers are doing everything from shifting their sales-channel focus to fundamentally changing how they do business.
Sooner or later, product companies will be required to audit their inventory. Learn the basics with Cin7’s introduction to auditing for inventory.
Lost, obsolete or overstocked inventory drives up costs and destroys margins. Without inventory visibility, you won’t know your business is suffering until it’s too late.