Inventory is generally one of the most tangible and visible aspects of owning a small
business. Raw materials, materials in process or finished goods represent inventory.
Merchandise stock is a major portion of your investment in the business. Your inventory
must be well managed to maximize profits—uncontrolled inventories are inefficient and
costly. Old goods often have to be discarded, which represents and unrecovered expenses.
Inventories that have too many products in one category often result in a surplus of
hard-to-sell items that result in deep discounting. Such discounts can often eliminate
profit on the item. You want to maintain enough inventory to meet demand, prevent product
aging and avoid under-performing products in the industry.
Inventory management is difficult. There are tangible expenses associated with carrying
an inventory that extend beyond the direct costs of purchasing an inventory. Storage,
insurance, taxes and staff time to manage an inventory all tie up cash the business would
otherwise have for other operating expenses or profits. Small reduction in an inventory
investment may result in large changes in the firm’s cash position. However, the
small business owner must balance the need to control inventory size with the desire to
maintain an assortment of products that can be purchased in sufficient volume to earn
purchasing discounts. A varied assortment of products should be maintained in order to
meet the demand of today’s customer, who likes a choices of products within any given
product category. When possible make volume purchases of popular goods to obtain low
prices, but avoid overbuying.
Take time to measure the average turnover rate of your inventory. This simple measure
tells the business owner how many times annually inventory turns over. Generally expressed
in dollars, it is total sales divided by the average amount of inventory. This measure
offers a rough guide by which to set goals and measure performance. To determine whether a
particular rate is above or below what it should be for your business type, consult your
trade association or other industry sources for comparative data. Also evaluate the
composition of your inventory. You may have low ticket, high turnover items, as well as
high ticket items, which you sell in a smaller quantity but at higher prices.
The effective business owner will have a continuing record of what is in stock and a
method for checking items moving in and out of stock. If recorded consistently, the owner
will know at any given time the total inventory for the business and how long each item
has been in stock. With computerized record-keeping this should become a routine business
task. Inventory is a resource to be managed to effectively fulfill consumer demand and
generate sales for the business.
For more information about inventory management, contact the SCORE Association (Service
Corps of Retired Executives). More than 12,000 volunteer business counselors donate their
time to help small business owners effectively manage their businesses. SCORE is a
nonprofit association, SCORE counselors provide free and confidential business counseling
to entrepreneurs. For a referral to the SCORE chapter nearest you, call 1 (800) 634-0245.
