Did you know your point-of-sale (POS) system is not an inventory management strategy? Many business owners believe they automatically have an inventory management strategy because their POS tracks their sales. In actuality, the two do not equal each other. An actual inventory strategy goes beyond tracking sales to give a complete picture of a business’s inventory by ensuring accurate valuation, efficient ordering, and optimal stock levels.
Now is the perfect time to overhaul your inventory management strategy if you are questioning your current processes or know you don’t have a strategy to begin with. As we end Q1, we encourage you to evaluate your current strategy—even if you think everything is going well—to identify any gaps that could harm your business’s bottom line this year.
If your business has relied on a POS for inventory management, you likely have discrepancies you may not even be aware of. However, the good news is that by following these four steps, your business can revamp its inventory management strategy and implement inventory best practices moving forward.
Conducting a full inventory count is the most important first step in creating a comprehensive inventory management strategy. As you complete this count, remember these three things:
You can visit our resources page for additional steps as you complete your full count.
In our experience, many businesses value inventory based on retail price, but true inventory valuation is based on the cost of inputs. For example, if you own a restaurant and sell a salad for $15.00, but it costs you $10.00 to make the salad, the inventory value should be $10.00, not $15.00, since the value is based on the cost of inputs. This simple example can be applied to most businesses to get the correct inventory valuation for their goods.
No matter your business, the importance of getting your inventory valuation correct cannot be overstated. An incorrect valuation can distort your financial reporting, ultimately impacting your profitability.
As your business works to create accurate inventory management systems, an important step is setting Periodic Automatic Replenishment (PAR) Levels, which are the minimum and maximum stock levels to maintain efficient ordering for your business. Too much inventory can create overstock and unnecessarily tie up your cash flow, whereas having too little creates delays and shortages.
A general rule of thumb is to have 2 weeks’ worth of inventory per month’s sales. So, if your business does $100,000 in monthly sales, you should have $50,000 worth of inventory on your shelves, not $500,000. Establishing these levels gives your business a roadmap to optimize operations and can even free up capital for other growth initiatives.
As your business works on implementing these inventory management best practices, you should consider these additional things to ensure your strategy is as effective as possible:
If your inventory management strategy begins and ends with a POS, you’re missing critical insights that affect cash flow, profitability, and operational efficiency. Fortunately, we’re still in Q1, and now is the perfect time to check in on your inventory to:
Creating an effective inventory management strategy can be overwhelming, but you don’t have to do it alone. Our team is here to help with in-depth inventory costing & valuation services. Whether your business is seeking assistance with a small project or a full audit, contact us at grow@cultivateconsulting.co to learn how we can help optimize your inventory processes.
Christine Gervais
Christine Gervais is a licensed CPA, using her skills to help businesses grow and achieve their fullest potential. Christine has a Master’s degree in accounting from Southern New Hampshire University in addition to holding her CPA license for over a decade. Notably, Christine is a nationally recognized speaker providing education to other CPAs on how to best serve clients as well as instruction on a wide variety of topics for business owners on how to maximize success. Christine prides herself on the value she can bring to clients with her extensive tax knowledge and provides strategic, forward-thinking financial strategies to help clients grow. When not behind her desk, you can find Christine spending quality time with her daughter and stepson or tending to the family’s excessively loved farm animals.
