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Thread: Proper Inventory Control

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    Proper Inventory Control

    Inventory or stock as it is also called, can devastate a business. A business carrying inventory has a much more difficult chance of survival, as opposed to a business rendering a mere service. A service business has a reasonable shot at surviving. Many business owners have major concerns with their inventory.

    Herewith, some of the most common difficulties associated with inventory, and its most probable causes.
    a) Business is booming, but cash flow is slow. (Debtor’s leniency/mark-ups)
    b) Business is slow, but inventory is low or short. (Shrinkage /pilferage)
    c) Lack of cash to “stock up”. (Cash flow planning)
    d) Inventory on hand remains high. (Slow moving inventories)
    e) Cannot find sufficient inventory. (Planning)
    f) Remain in a loss position. (All of the above)

    Administration and accounting for inventory should become a habit. A lot of savvy is also required if you going to make your inventory carrying business succeed.

    · Start by doing a proper inventory count on hand and valuation.
    · Identify slow or non-moving items in your inventory lists.
    · List inventory that becomes obsolete rapidly (highly important with restaurants)
    · If possible, code inventory items electronically.
    · Research mark-up and margins, and implement a reasonable gross profit margin. (If it is too high, the goods will not sell, if it is too low you will remain stuck in a cash flow rut).
    · Prepare a spreadsheet for your incoming and outgoing inventory. If an advanced point of sales system is in place, which interfaces with your accounting system, even better.
    · Consider taking out insurance for possible inventory losses, like fire, theft or natural disasters.
    · Stay on top of your inventory on a daily basis.

    The most advanced computerized inventory system however is not enough. Regular inventory checks, is of paramount importance. Example;
    Inventory on a computer screen remains “theoretical”. Pilferage and shrinkage in most stores is a common occurrence, and a variance in physical inventory and theoretical inventory, invariably always exists. A quick formula would look like this. Inventory on hand, plus inventory purchased, less inventory sold- at –cost, equals theoretical inventory on hand. Perform a physical count, and compare that to your book values (theoretical value), and you will swiftly establish if you lost inventory due to pilferage or shrinkage.

    Don’t waste cash by purchasing slow moving items. Sell all that inventory at a major discount and start focusing on items that bring in the cash.
    Be careful with extending credit. Inventory adds to your working capital woes. Don’t exacerbate the problem by adding bad debt. Try to be a COD business, or provide major discount for early settlement. If granting credit is the only way, ensure that you also secure reasonable credit terms from suppliers. If suppliers insist on cash only, then credit is not possible. If suppliers can grant you 60-day settlement, you can grant 30 days to your debtors.

    Set aside 30% of daily takings for future inventory requirements. The saddest aspect of small business is that they lack cash for additional supplies and expansion. A business credit card can come in extremely handy. Buy inventory in bulk using available cash plus the credit cards available amount. Deposit amounts set aside for inventory into the credit card, at your soonest convenience. Banks are averse to finance inventory, but they gladly furnish credit cards. Take advantage of this.

    Sell inventory at markdowns if it moves slowly. A loss will be incurred on inventory sold below costs, but cash realized on these sales puts you in a better position to move ahead.

    In the restaurants business, 90 % of the inventory is perishable goods. Patrons, furthermore demand fresh food. And if the food purchased in a particular day, is not sold that very day, the restaurant will encounter serious difficulties. The remnants of unprocessed foods are useless, and nothing can be done, to recoup any losses. This clearly reveals, why the restaurant business is so difficult. Again, know what items on the menu will sell, and order only those items. Vigorous control over the kitchens where these supplies are processed cannot be overlooked. Negligent chefs and waiters cannot be allowed to waste those expensive foodstuffs.

    Inventory problems cannot be isolated to one or two factors only. The reason why a continuous problem, with inventory persists is that business owners do not expand their investigations to a variety of complex issues. Managers and business owners should be “hands on”, and identify a problem as soon as it rears its head.
    A presence on the shop floor is a necessity. Keeping an eye on employees as well. Inventory is stolen or wasted in many instances. Of course it is not possible to be all over at once, and losses are part of every business and unavoidable.

    Pay attention to minimizing losses on all fronts, be it, inventory, cash, clients and the businesses reputation!
    Sean Goss We all are scared, but only few are brave.

  2. Thanks given for this post:

    Dave A (25-Mar-09)

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