Why do small businesses suffer from poor inventory management? In many cases, inefficient inventory practices are due to management not really understanding the importance of keeping sufficient stock available to fulfil their orders. This may be due to a lack of capital, because they simply can’t afford to order 6 months’ inventory in one hit. It can also be due to a lack of understanding about how to manage inventories or simply to an apathetic approach – that it will all work out in the end.
The real cost to your business of not handling your inventory efficiently in the short term is lost profits; in the long term can be the loss of your business. Failing to invest your time and money into proper inventory management systems can cost your company its very existence.
Let’s take a look at some of the real world symptoms of poor stock control and how they relate to lost profits…
Too Much Stock
You might not think that holding an abundance of inventory could be a problem, but there are a few unexpected consequences from this management approach. With too much stock, you have invested your capital in a level of stock that is over and above your forecasted needs.
This ties up your money by reducing your cash flow, fills up your warehouse or storage facility to overflowing, and can lead to items either becoming out of date or superseded by new models. To claw money back, many businesses hold clearance sales; however, the end result is always a loss in profits.
Too Little Stock
When you don’t have sufficient stock to fulfill your clients’ orders, they can become disgruntled if it happens once; but they can look elsewhere for suppliers if it happens too often. Running out of inventory has a cascade effect. You may suffer delays from your own suppliers who have to rush through your order, and you might need to pay for costly air freight or couriers to deliver the new stock to your storage and distribution centre.
So when you don’t have enough stock to supply your clients, losing clients is a real possibility and trying to play ‘catch-up’ with your inventory can cost you even more money than normal.
Pricing Errors
Poor inventory control can lead to numerous pricing errors, giving both your business and your clients no end of grief. When your clients receive invoices for items that are under-priced, they may or may not tell you. But if over-priced, you can be sure that they will not be happy.
Pricing errors are a sign that your inventory is out of control and give your clients the impression that you are not a reliable supplier. Which can be very true, regardless of whether you sell shoes, garden furniture, coffee pots or computers.
Having no stock, or not having the right stock, or being over stocked for a long period of time, means working capital allowances are either too low or simply not being deployed correctly, which can cost a business is sales, profits and market share in the long run.
Stock Turnover P.A.= Sales P.A. / Average Stock holding
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