Forecasting is a tool you can use to predict how much inventory you will need. You can use previous sales figures, but be sure to also consider market trends, any special promotions you have coming up, and predicted growth.
After taking all of that into consideration, analyze how much product you will likely sell and buy the materials needed to make that much product.
This technique is simply ensuring the items you make or buy first are sold first.
If you sell perishable items like food or flowers you want to sell them before they start wilting or expiring. This may seem like a small thing, but ensuring you sell your items in the order they are made or bought prevents wasting inventory on expired items. Doing this gives you a system that makes it easier to sell your products.
Most small businesses use some sort of computer software to keep track of their inventory, but it is a good idea to count your inventory yourself at least once a year. You never know when software can stop working properly or inventory could be misplaced.
If you are having troubles with inventory you may do a spot-check to make sure the inventory in your system matches what you have.There are a few other aspects of inventory management that warrant going into a bit more detail, let’s dive into them.
Cost of Goods Sold ➗ Average Inventory = Inventory Turnover RatioAs the name implies, the Cost of Goods Sold (COGS) is equal to the production costs of the products. COGS can include the cost of materials, labor costs, and any factory overhead or fixed costs that are used in the production of goods. Average Inventory is the average of the product you have in stock, which is used to make up for the fact that inventory can fluctuate throughout the year (it might be lower during slow periods or higher during holidays, etc.). After doing the above you need to find the Days Sales of Inventory (DSI):
(Average Inventory ➗ Cost of Goods Sold) ✖️ 365 = Days Sales of InventoryThis measures how many days it takes for inventory to turn into sales. A higher DSI means that the inventory is taking longer to turn into a sale. You can compare products using this method to figure out which product can handle a decrease in inventory the best.
(Beginning Inventory ➕ Ending Inventory) ➗ 2 = Average Inventory
The software allows you or the customer to know immediately whether an item is in stock. This can not only reduce confusion when you run out of something, but it can also notify you when you need to reorder some inventory items.
A lot of inventory management software integrates with accounting software which can be extremely useful in tracking cash flows and other costs. This can also save you money by preventing the need for additional bookkeeping.
We’ve already discussed the importance of forecasting, but that can be quite difficult to do on your own. Most inventory management software generates forecasting reports for you to analyze.
Anyone that deals with technology regularly can tell you it not always means smooth sailing. There are always glitches or issues that can affect the software, and the worst-case scenario is that the system can shut down completely.
Most software packages will have some sort of tech support, but you should always have a backup plan in case your system goes down.
Some business owners make the mistake of using the software as a crutch to avoid physical audits, which are admittedly time-consuming.
However, it is important to spot check your inventory frequently to catch issues like breaking or spoiling. Plus, there is always a chance that your software messes up, and you want to be able to catch that as quickly as possible.
Can you sell online without inventory? You can with Dropshipping, a business model that allows owners to sell products without having them in stock.
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