How Inventory Management Can Make or Break Your Small Business
- Economic Environment: It’s always wise to run a tight ship, but never more so than when the economy slows down. When sales slow down due to the economy, a “tight ship” means buying or making only enough inventory that can be sold in a relatively short time period. If the economy turns inflationary (costs of goods increase faster than expected), consider talking to your accountant about “LIFO” inventory management. Using a last-in, first-out inventory costing approach allows your cost of goods sold to mirror the most recent inflationary price hikes. This can benefit your business because it can lower your taxable income and income taxes.
- Market Environment: Today’s taste may be tomorrow’s waste — that’s the way it can go with a fickle consumer base. When some of your inventory goes out of style, your best move is often to mark down prices and take an accounting loss. The result is you restate your inventory value at the lower of cost or market, which in this case is market value. The benefit to your business by doing so, is that it boosts your COGS (cost of goods sold) and thereby cuts your annual taxable income — or even hands you a net loss for the year. Either way, it reduces your tax bill. You might have to write off inventory because of external factors like product recalls, boycotts, obsolescence, bad publicity and tariffs, to name a few.
- Shrinkage: Shrinkage – no, we’re not referring to George Costanza here — theft, spoilage, damage, short shipments, misplacement are all big enemies of profits. Fight back with cycle counting, in which you perform a daily physical count of a different part of your inventory. Repeat the cycle until you’ve surveyed all of your inventory, then begin again. The advantage is that you’ll detect shrinkage much sooner than if you had waited until the end of the year to perform an inventory check. The sooner you discover a problem, the sooner you can address it. If you uncover an issue, some potential ways to address it include adjusting your storage and security procedures, changing management or security personnel, finding new suppliers, or at worst, fire a dishonest employee.
- Inventory Tracking: Even if you’re running a small business, you can still consider automating your inventory tracking from inception to sale. High-tech features such as bar code scanners and radio frequency guns can track all movements of your stock items, allowing you to establish a perpetual inventory system saving you buckets of time that can be invested elsewhere to grow your business. Making investments in inventory tracking pay off with timely, accurate information about goods on hand and COGS. You also might be able to delay or reduce time spent on physical inventory counts. To maximize your benefit, take the extra step to integrate the information into your accounting and procurement systems.
