Of the many small and medium businesses we have worked with, those that have the most difficulty managing business growth are almost always those with inventory. When they start out they may be able to manage their inventory manually – perhaps aided by Excel – but as they grow this very quickly becomes impossible.
Problems that can arise through not having an inventory management system
As businesses grow, the complexity of managing inventory grows too. Once you have multiple salespeople, or you split the roles of selling and buying, it becomes almost impossible to keep on top of what is in the warehouse, let alone what is committed on customer orders, and what is currently on order from suppliers.
The problems this can cause include:
Inefficient order processing
Without a stock system both sales and purchase prices need to be manually checked, invoice descriptions have to be manually keyed, account and GST codes have to be manually entered. This all results in wasted time.
Having to manually check stock levels, split orders and call back customers to explain that you cannot fulfil their whole order also wastes time and add costs.
Missed sales orders
You will receive (and maybe process) customer orders, only to discover you are out of stock of one or more items on the order. This results in loss of profit on the sale, additional costs of filling the order later, and (worst of all) a dissatisfied customer.
Overstocked/understocked at the same time
Most businesses will find they will miss some customer orders due to being out of stock on some items whilst at the same time carrying excess stock of other (slow-moving) items. These overstocked items harm your cash flow, take up space in the warehouse and add to operating costs.
Over-reliance on key people
Probably you, the business owner! The one person who knows what stock you have and where it is, what is on order and which key customers are likely to place an order next week suddenly becomes indispensable. Unfortunately that means never getting sick, never taking a holiday and never working on any other aspect of the business.
Lack of management information
For example, which customers are buying which products and which products or product groups are most profitable.
All too often such businesses are damaged by their lack of systems and struggle with lower growth, higher costs and lack of cash. Sometimes they fail altogether. But solutions suitable or any size of business are readily available, and – with a little preparation – easy to implement.
So what is an inventory management system?
An inventory management system is one that records information relating to the physical items you buy and sell. As long as you record all of your purchases (supplier invoices) and sales (customer invoices) your inventory will always be up to date. More advanced inventory systems have far more features, such as manufacturing (or assembly) and order management.
At the most basic level you will need to set up the items you sell (a unique code and name for each item) and a few simple pieces of information: the price you sell it for, is the item subject to GST and so on.
Often – even with a basic system – you will get more out of the system if you spend a little extra time on the set up, adding in such data as the preferred supplies and the “minimum/maximum” levels. More on this in a later article.
All of the popular small business accounting systems – such as MYOB, Xero, Quickbooks – include some inventory functionality. These solutions should be within the reach of and of benefit to even micro businesses.
Next month we’ll look at the key features of a basic inventory system, and how you can get started setting this up in your business.
In the meantime … is managing your inventory a problem for you? Do you have any questions I can help with?