Is It Time To Track Inventory?

Is inventory creating a data gap you cannot cross?

is it time for inventory tracking

For many new or rapidly expanding businesses, the value of the inventory may often represent a significant percentage of their total assets. For others, inventory costs are a trivial amount. Unless your business sells or stores items that are subject to legal oversight, such as certain hazardous materials or pharmaceuticals, there are no laws that require you to implement or maintain an inventory tracking system.

Most businesses, however, find that the benefits provided by effective inventory management make their efforts worthwhile, but it is also true that not every business needs to track inventory.

As no concrete rules exist regarding whether inventory tracking is needed, the decision as to whether your business should track inventory must be based on factors that are specific to each business. Answering the following questions can help you decide whether it is time for you to begin an inventory management system.

1.         Do you purchase just the quantities needed to fill orders as you receive them? For example, if you sell bridesmaids' dresses that are available in a variety of sizes and colors, do you stock all possible options in multiples or purchase the exact sizes in the requested color when your customer places an order? If the latter, you probably do not need to track inventory.

2.         Is the value of your inventory more than 25 percent of your monthly revenue?

If so, many accountants recommend that you establish an inventory management plan.

3.         How frequently do you miss a sales opportunity due to out-of-stock items? Lost opportunities can be difficult to identify, but you might have had customers call or visit your store to inquire whether you have a specific item.

You might also notice that a shelf is bare; perhaps customers are viewing an empty shelf instead of the item them intended to purchase and then leaving without a sale. One or two out-of-stock items over the course of a year are not likely to impact your sales, but more frequent instances could. A well-managed inventory tracking system could help you prevent out-of-stock items.

4.         How often do you receive more orders for items than you can fill on a timely basis? This is called overselling, and although it is similar to out-of-stock items, the term is more often used in e-commerce. Overselling can be particularly detrimental if you advertise next-day shipping or make similar promises, such as guaranteeing that an order will arrive by a holiday. Overselling is a good indication that you need to track your inventory.

5.         How confident are you that you are not experiencing inventory shrinkage? Disappearing inventory can be a sign of theft by shoppers or employees. It can also indicate unreported breakage. You might notice that a specific item has simply vanished, but you might also notice that the ratio between your sales and goods purchased accounts is unfavorable. Inventory tracking can help you identify shrinkage so that you can take corrective action.

6.         Do you maintain a supply of raw materials or components that you use to produce finished items for sale? If so, you may need inventory tracking to help you ensure that you have sufficient materials on hand to produce the items you will need to meet your customers' demands.

Establishing an Inventory Tracking System

Major manufacturing and retail operations typically have complex inventory tracking systems that connect their logistics, order entry, purchasing, production scheduling, point-of-sale devices, cost accounting and other departments. Smaller enterprises, however, do not usually need this complicated a method of inventory tracking, at least not at first. A system can be as simple as a file box containing index cards or a binder that holds a sheet of paper for each item in your inventory.

There are also a number of off-the-shelf software programs for inventory management, and some of the more rudimentary programs can be downloaded for free.

Naturally, your inventory management system will need to reflect the nature of your business and your specific needs. Most good inventory systems, however, include the following information.

1.         Location: Assign a simple location code for every spot used to store inventory. If you have three shelving units, for example, you could use the letters A, B and C to represent the units, followed by a number to represent the specific shelf, such as A-2 or C-4.

2.         Item: You will need to establish an item number or description for each item you plan to inventory. The complexity of the item number varies. For example, if you sell a wide variety of women's dresses, you could establish a numbering system that identifies the style, color and size of each dress sold. On the other hand, you could simply include all dresses under a single number, establish separate numbers for each size or choose any other method. If you resell items that you purchase from a wholesaler, you could simply use the wholesaler's stock number. This will make reordering fairly simple as well.

3.         Cost: You will need to know the unit cost of each item to value your inventory. This cost may change with every new order. Tracking fluctuating costs will directly impact your gross profit margin and cost of goods sold, so having an accurate number will be a key factor in keeping an accurate P&L.

4.         Source: Include the name of the vendor from whom you made the purchase. This record keeping will enable you to quickly reorder or track vendor changes alongside quality or cost variations.

5.         Date: Record the date that you received the merchandise.

6.         Quantity: Enter the number of units you received or currently have on hand.

7.         Reorder: Based on your anticipated sales and the vendor's lead-time, you should determine the point at which you need to reorder the product.

8.         Activity: As sales occur, record the date and quantity, then subtract the units sold from the on-hand quantity. You will also need to record items that were broken in the store or otherwise rendered unsellable.

Whether you choose a manual system or a software solution, the key to effective inventory tracking is to maintain your records with regularity and routine. Depending on your business, you may need to update your manual records daily, weekly or monthly. A computerized solution can eliminate many of the manual tasks, but even an automated system will require maintenance, such as entering new item numbers or updating location codes. This means developing a standardized process and educating anyone who will touch it on how to best manage and maintain it.

Ultimately, the decision regarding whether to implement inventory tracking and the best method to use must rest with each business owner. Only you can determine whether the nature of your business, your volume and your particular issues could benefit from a formal inventory management policy.