6 Ways Overstocking Costs Your Small Business

When you are running a small business money is often tight. Companies need to make sure they allocate their cash strategically, because too much spending in one area can cause shortfalls in others.

One costly mistake can be overstocking inventory and materials. In a merchandising company, inventory represents the goods that will be sold. For a manufacturing company, overstocking can result from buying too many raw materials and components. In either case, overstocking can create several unwanted costs that can overwhelm the savings that comes from buying in bulk:

  1. Storage costs: When you have a large amount of inventory or raw goods on hand, you need sufficient space to hold the materials. That translates into leasing, buying or building storage facilities and warehouses, which must be secured, powered, insured and staffed. If you create additional warehouse space, you might see an increase in your transportation costs as well.
  2. Deterioration: Many things can go wrong when you have an overstocked warehouse. Often times, your merchandise and raw materials wait longer before they are removed for use. This is a critical problem for items that can spoil, such as foodstuffs, agricultural goods, pharmaceuticals and anything with an expiration date. In addition, every time an item must be moved, it is subject to damage that can ruin its value. Overstocking items can result in additional movements and staging that can lead to wastage.
  3. Shrinkage: The more materials your small business keeps on hand, the harder it is to guard it all. It’s easier for a worker to steal an item when it’s one of many, since its loss is harder to recognize. To help prevent shrinkage, you will have to spend extra money on security precautions. Any way you slice it, shrinkage is costly.
  4. Obsolescence: You might get a great deal on a huge order of some item, only to find out that it has gone out of style before you can sell off your excess inventory. Fads come and go, and the public can be fickle. Furthermore, you don’t want to get stuck with an item when a new, improved version is announced that makes your current inventory obsolete.
  5. Economic downturn: A recession can happen at any time, and with it a downturn in demand. They last thing you want is to be stuck with too many raw materials just as you cut back on production. That’s exactly what can happen if you buy too much at one time. Overstocking is the enemy of just-in-time manufacturing, which is the best way to keep your production in sync with demand.
  6. Unbalanced spending: Overstocking means over-allocating working capital to inventory and raw goods. You then might find yourself short of funds to finance the purchase of equipment, facilities and other capital goods, as well as to pay other expenses and liabilities. For example, you might order extra raw goods in anticipation of increasing production, and then realize you’ll need more trucks to transport the goods. If you can’t afford to buy the trucks you’ll need, your extra raw goods won’t increase production, but they will boost costs.

Sometimes, it does make sense to buy in unusually large amounts, such as when you are certain that all of the purchases can be used quickly to increase sales. If you find yourself short on working capital but want to take advantage of a great deal from a supplier, contact IOU Financial for a quick and easy commercial loan to tide your business over until you turn your purchases into sales.

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