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Summary: You earn money when your inventory goes out of the warehouse. But do you have a 360-degree view of how the inventory is moving — from the initial receipt to shipping. The most important pillar for establishing a profitable business is total visibility of the inventory process from beginning to end. And it comes by implementing an inventory management system that keeps optimal inventory stock and supply chain organized throughout the year.
This blog will offer knowledge regarding inventory management and how an inventory management system will help you increase profitability and eliminate waste.
Inventory is the most significant asset that businesses of all sizes own. And therefore, inventory mismanagement is one of the biggest reasons small and medium-sized businesses fail.
Here are a few disadvantages you will face due to inefficient inventory management:
If you are aware of the changing market trends and customer preferences, you will always stay ahead of the market curve. You can capitalize on popular items that customers are more likely to purchase, multiplying your profits.
If you have excessive stock, you are wasting a lot of money. Firstly, you are paying too much for renting warehouse space. And secondly, many perishable products decay even before you can sell them.
If you don’t have adequate supplies of products that customers want, they will look out for other sellers. Therefore, if you face stockouts too often, you will lose a large base of your customers.
To establish a profitable business, you must track and manage inventory quickly and efficiently. The benefits of inventory management software are:
Earlier, companies used to count each item manually and record the figures using the traditional pen and paper format. But with a digital inventory management system, you save money and also eliminate human-induced errors. Moreover, finance professionals can focus on mission-critical tasks instead of wasting time on managing accounts.
The key capabilities of inventory management software include:
Inventory management software provides real-time inventory status allowing you to maintain adequate stocks. But simultaneously, it also offers insights into the changing market trends and customer preferences so that you don’t lose on sales opportunities and increase your customer base.
You can choose amongst different types of inventory management software — Perpetual and Periodic inventory systems.
Small businesses that have less inventory to manage and lack sufficient investment to implement a full-fledged computerized system opt for periodic inventory. They physically count the inventory and the Cost Of Goods Sold (COGS).
A company’s gross margin is calculated by subtracting COGS from revenue. Here’s the formula for calculating COGS in the periodic inventory system:
Companies are often unaware of the exact quantity of stock they have in the warehouse. As a result, they conduct physical counts every week, month, or quarter.
Here’s a brief description of the process:
The only disadvantage of periodic inventory is that companies have to count and update every physical quantity in the inventory, which is time-consuming and prone to error. Consider an electronic equipment manufacturer with multiple warehouses worldwide purchasing various parts required for manufacturing a smartphone. Now, imagine a large team counting each such part. Can you imagine the time spent performing this activity? Consequently, companies perform physical count once a month, quarter, or year.
The perpetual inventory systems measures inventory balance in real-time using computerized systems. Point of sale (POS) systems record inventory purchases and sales accurately (unless goods aren’t damaged or broken). Moreover, the COGS account is also updated as soon as a sale is made and the data is sent to central databases in real-time. Perpetual inventory uses technology to its fullest; therefore, the workforce plays a minor role compared to the periodic inventory.
However, implementing, updating, and maintaining an inventory management system is costly. But the advantages outweigh the disadvantages easily. For example:
Inventory is a business asset and therefore, inventory management and accounting are intimately connected. It would be best if your inventory management software contains numerous inventory valuation methods. It helps extract real-time metrics about products at each step in the process.
Here’s a list of essential inventory valuation functions your inventory management software must contain:
This function is calculated by dividing the total cost of goods available for sale by the total number of goods.
This function is calculated by dividing the cost of goods sold by the average inventory in hand.
Here are a few factors you should remember:
Contains the list of sub-items that form a single inventory item.
The accounting records contain two values — The actual cost of the product and the expected cost of an item. The variance between the two values is updated in the accounting records. Companies use this method mostly when it takes substantial time to track actual costs in real-time.
Assembling parts and items to form a single finished item.
Monitors inventory progress from the manufacturing facility to the shop floor where it’s finally used.
It refers to receiving inventory just before or exactly at the predetermined time.
An inventory management system is a critical part of Enterprise Resource Planning (ERP) software. ERP unifies various modules, including accounting, point-of-sale, inventory management, and supply chain management, into a single platform providing the required efficiency.
Cloud-based inventory management systems enable businesses to collect, store and analyze inventory data in real-time. Other advantages include generating highly detailed reports for improved collaboration and accessing crucial data from anywhere, anytime, and on any connected device.
Without integrating the inventory management system with the ERP software or other back-end and front-end business applications, it might not be as effective.
Built-in AI capabilities provide suggestions regarding changing market trends and customer preferences, what customers are most likely to purchase in the coming future and data-based recommendations for inventory levels.
Inventory management systems come in varying shapes and sizes. Therefore, it would be best to identify your business needs, which will help you zero in on the essential modules required to perform your business functions quickly and efficiently. Also, ensure that you implement a scalable ERP system, meaning it can add new modules as your business expands.
The best part about cloud-based inventory management software is that it’s easy to implement and update compared to on-premise solutions. In addition, cloud-based solutions have cutting-edge security features that are updated automatically. On the other hand, on-premise solutions take time to update and are vulnerable to external attacks.
Inventory management software should be able to track the real-time location of inventory while it’s moving across the supply chain. Also, you must check that the software is compatible with bar code scanners enabling you to scan product details instantly.
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