Today’s Biz Ladies post comes to us from Bridge Mellichamp of Stitch Labs, an online inventory management system. The team at Stitch Labs works to ensure that no matter the size of your business, you can quickly make smart business decisions, and today Bridge will be tackling the subject of efficiently and effectively managing your company’s inventory, while sharing some great resources for keeping things organized. -Stephanie
Read the full post after the jump…
What is Inventory Management?
What do you have and where is it? That’s the main theme of Inventory Management, though the details can get much more involved.
An expert may describe it as tracking the size and location of your product. Size here encompasses the quantity and variety of your stock, while location includes your stock in transit as well as what’s on the shelf or in the workshop.
Entire books and college courses are dedicated to Inventory Management, but don’t let yourself get overwhelmed just yet. If you can count your stock and list its location, you can get started.
Why is it important?
When you start out small, it can be easy to ballpark your inventory or just tally supplies as needed. The scope of your warehouse might be five boxes in a spare room and you might have just two vendors. It’s easy to see everything on one page of a spreadsheet and moving tallies from a notebook only takes a few minutes from your day. However, as your business grows, a casual approach to tracking inventory can lead to clumsy organization, wasted time and foggy planning for the future.
The benefits of good inventory management can be seen in every part of your business, but most importantly, good practice creates needed data to inform both daily and long term decisions.
How to Track Your Inventory
While an Excel spreadsheet may suffice early on, this method can become unwieldy and lower your overall visibility as your inventory develops.
Inventory management software is the next step up and offers many benefits that include ease in categorizing your stock, order tracking, invoice creation, contact management, and reporting.
Current tools offer additional features over what’s been available in the past. These include:
- Web-based – Removing the need to install software on every machine, web-based applications can be accessed from any computer that can access web pages. So, it won’t matter if you’re on your Windows machine at home or on your MacBook at the craft fair. Plus, web-based applications back up to the cloud, lowering the risk of losing files that you only saved to one computer.
- Integration – Good inventory management tools will integrate with the other current business applications small businesses are using. For example, your inventory management tool can tie into your Etsy account to automatically adjust your numbers when you make a sale there. Or, it could tie into a mobile payment method, like SAIL, to track sales made through your iPad at a street market.
- Visual Data – Data visualization is a hot topic that refers to the practice of taking all the numbers and putting them into a picture that makes sense. Current inventory management applications will offer more than just pie charts and will give you both smart reports they’ve created as well as tools to create your own.
As you explore inventory management, it’s easy to run into a lot of new terminology. Let’s take a moment to look to define some of the most common terms.
- COGS (Cost of Goods Sold) – This is overall cost in getting the finished product into your inventory. However, this cost is only counted once the unit is sold. The scope of costs counted in COGS fall into three main categories: parts, labor and overhead. For example, if you make your own goods, this could include the cost of supplies, cost of shipping supplies, cost of labor, and the costs of workshop space. If you order and then sell already-finished goods, the COGS will include the price you pay the vendor, plus the costs involved in getting it into your stock.
- Inventory Turnover – Turnover is a key concept for business accounting, but understanding it has importance to your day to day operations. In basic, it’s how many times your inventory is sold in a selected amount of time and it’s calculated by dividing the COGS by the average inventory for a period. Good turnover rates vary by industry. Low turnover rates could mean that you might be stocking too much, have obsolete products that aren’t selling, or need to work on marketing. Higher turnover is generally preferable, but too high of rates could mean you aren’t keeping enough products on hand or that you’re possibly selling it too cheap. As you dig more into turnover, keep in mind that this concept can also be referred to as inventory turns, stockturn, stock turns, turns, or stock turnover.
- Inventory Reconciliation – This is another concept that can get overlooked as accounting jargon, but has an important operations component. On the physical side, this is the task of comparing what you actually have in your inventory to what your records say you have. Beyond the financials, this measurement can alert you to problems like shrink (misplaced goods, stolen goods, etc.) or damage (products that enter inventory in an unsellable state). While reconciliation must be done periodically, approaches that make this a perpetual practice can vastly improve your decision making.
- Stock Available vs. Stock Committed – As people order your goods, there are points where they’re still on your shelf, but not available for sale. It’s important to keep this distinction in your numbers to avoid being oversold. Available stock is what is still up for sale, while committed is stock that has already been ordered (whether that’s from a pending shipment or an earlier contract). For example, let’s assume you have 5 hats on your shelf when someone places an order online for 2 of them. While there are 5 still on your shelf, only 3 are still available.
Inventory Management may sound like a dry, possibly daunting, topic. However, it’s a critical centerpiece in running an organized, efficient small business.
The starting point is following a system that tracks the size and location of your product, but the details will include incoming supplies, outgoing orders, invoices, returns, works in progress, and the myriad of other things that can be counted and recorded.
Good practices over time offer immense benefit in informing your business decisions. You will have a clearer understanding of the sales you’ve made so far and better perspective on choices for the future.