Managing inventory is one of the crucial issues that all entrepreneurs and people in business face. Stock is expensive, and businesses invest a lot of money to maintain it. Hence organizing it is a big task.
For any business to run smoothly, the stock needs to be running. The best-selling item needs to be restocked, and deadstock needs to be sold as soon as possible.
Inventory cost and profit relation
Investing time before purchasing inventory is very important. The purchase and production cost of the inventory plays a significant role in determining gross profit.
The gross profit is computed by deducting the cost of goods sold from net sales. An overall decrease in inventory cost results in a lower price of goods that will be sold. Gross profit increases as the cost of goods sold drops.
Hence if you want to maximize your profit, be a conscious and aware consumer first. Compare the market rates of the raw materials before purchase.
How to organize inventory in a small business
For every business, some amount of inventory is needed. Be in raw materials, ready goods, packaging items, etc. Buying and properly storing them is necessary. But bulk buying of unnecessary stock or shortage of items can lead to a crisis.
Hence, you should review your sales and identify the best and the worst-selling product from time to time. As you categorize your products according to their sales, you will know which products to stock more and which can be discontinued.
The most commonly used approach for classifying inventory items is the ABC analysis.
What is an ABC analysis?
It is an approach for classifying inventory items based on the item’s consumption values. Consumption value is the total value of a commodity consumed over a specified period, for example, a year.
In simple words, this analysis helps you find out which product is the most profitable to your business and which ones cost your business.
ABC analysis is based on the Pareto principle or the 80/20 rule. It classifies your inventory into three categories based on total revenue.
A grade- This is your best-selling inventory or the ‘moneymaker.’ It can be a small or a medium-sized portion of your products, which bring about 80% of your revenue. It is your most valuable inventory and should be prioritized. You should always keep these items in stock as they get sold out very fast.
B grade – This is your mediocre inventory. This accounts for 15% of your revenue. The sales of this inventory range between Grade A and C. That means it at times sells, it at times doesn’t.
C grade – This is your worst-performing stock or your ‘deadstock.’ It brings very little value to your business and is more of a liability. It should be deprioritized or discontinued.
Inventory issues faced by most small businesses
For well-established businesses, it is easier to manufacture products if there is scarcity. They also get rid of dead stocks by offering attractive sales and discounts. But it isn’t that easy for startups to do that.
For small and medium businesses, the cost of the inventory is higher. The production cost is higher as it is not made in bulk in factories. Hence, they cannot give significant discounts as they might suffer a loss.
Due to the lockdown halt in business and manufacturing of goods, many companies have faced problems in procuring materials and products. Deliveries have been delayed as worldwide shipments are taking a much longer time than before. This supply chain irregularity has led to scarcity in the market. Some people have started hoarding items too.
Another major issue faced is that the staff employed by them are new and inexperienced. They can make many mistakes while labeling or organizing the products.
Home businesses usually face problems while stocking goods due to the unavailability of space at home. Hence, they have to purchase in less quantity, which leads to shortages.
How to deal with dead stock?
Dealing with dead stock is a headache for most businesses. For example, in food businesses, if the items are not sold before their expiry, they become dead stock and occupy space in your inventory.
If a trend goes out of style in the clothing business, then all your stock of that particular item becomes a liability.
There are several ways you can get rid of it and get back at least your capital and a little profit.
Discounts – You can offer discounts on the goods which are not doing well. People tend to purchase goods if they get a discount on them.
Freeby – Let us consider this example, in your store, if a microwave is not selling, you can advertise to your customers that if they purchase a minimum of rupees 10,000 from you, they will get this microwave for free.
This way, your microwaves will get sold, and you will clean up that inventory. You can also do this the other way by pairing your best-selling item together with your worst-selling item. If your TV sets are selling well, you can advertise that ‘whoever buys a TV gets a microwave for free.’
Advertising them more – you can advertise your dead stock more, publish advertisements in the newspaper, television, radio, or social media. Add catchy phrases to it like ‘limited stock,’ ‘special edition,’ etc. this will create urgency and get sold.
People are discovering new and innovative ways to organize and manage their inventories. With changing times, people have adapted themselves to sustain their businesses.
Have you faced similar issues while dealing with your inventory?
Please share your experience in the comment section below, how you solved them.
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