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Managing inventory requires careful calculations

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February 03, 2013
Are you happy with how many times you are turning your inventory?

Have you run out of certain items that are in demand?

Are you overstocked with other items that haven't sold in a while?

Do you have enough raw materials to manufacture your products?

Inventory is a big asset for small businesses who either manufacture or sell products, and managing your inventory efficiently and effectively can have a big impact on your bottom line.

Inventory management is primarily about specifying the size and placement of stocked goods. It involves a myriad of information like purchasing lead-time, carrying costs, demand forecasting, valuation, available space, returns and turns. Small businesses that understand this information and increase their inventory turns will improve the financial health of their balance sheet.

Inventory management requires constant and careful evaluation of external and internal factors and control through continuous monitoring, reviews and interactions with production, procurement and finance departments. All organizations engaged in either the production or sales of products hold inventory in one form or another. And all inventory, whether it's raw material, work-in-process or finished goods, has some economic value to the company.

Prior to the computer age, inventory management was basically done manually. Counting stock-keeping units (SKUs) on an annual, quarterly or monthly basis was a normal routine to make sure you have enough in stock, but not too much. Technology has significantly improved the efficiency and effectiveness of this process. Everything from point-of-sale terminals to bar code scanners to radio-frequency identification tags provide quicker and more accurate monitoring and maintenance of inventory.

Accounting systems like QuickBooks now provide an inventory management module that allows you to "connect" your sales projections to your inventory and make it easier to manage. This allows you to study demand cycles. Not stocking a lot of suntan lotion in the winter and a lot of gloves in the summer is easy. What about the thousands of other products you sell?

Inventory is a very expensive asset. Information about your inventory is cheap, but it has to be consistently accurate and available all the time to deliver value. Making sure your customers can get your products when they want them, while at the same time minimizing you investment in inventory will help you maximize your profits.

Inventory basics require that everything is "tagged" correctly, priced correctly, counted accurately and monitored continuously. Ongoing planning, taking advantage of discount terms with your vendors and utilizing inventory management technology will help you to manage a big asset in your small business and improve your bottom line results.

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