What is the best way to manage inventory? Well, one of the worst things that can happen to you as a business owner is to have willing customers flock to you, only to find that you don’t actually have anything to sell. Therefore, it seems like a good idea to have more stock than you need, if only to avoid running low. But the point of a business is not only to sell product and services, but also make a profit on it. Having too much inventory will incur additional costs, to the point where they can affect the business as much as losing customers can.
The ground rules
Usually, the life cycle of a particular product in a business amounts to this: you buy the product at a certain price, store it for a certain period of time and then sell it at a higher price that brings you a profit. This is the way it’s supposed to go. Pretty straightforward, right? It is. But there are a few simple rules that you need to keep in mind to prevent your business being crippled by this apparently uncomplicated process.
Firstly, when you buy a product, you tie up a part of your capital that can’t be used for anything else. This money actually amounts to more than the purchase price, because there are costs associated with keeping the product in stock. The only way to get back that portion of your capital (and more) is to sell the product. So essentially, purchase of stock is an act of investment.
Secondly, time is of the essence. You need to sell the stock and get back that capital with a profit soon, preferably now. The longer a product remains on your shelf, the less likely it is to be sold. In the end, if you manage to sell it at all, it would be with a big discount.
Stockouts and overstocks
Stockout is a situation where there is a shortage of stock. This can spell disaster for a business as it not only prevents sales in the short-term, but can also damage the future prospects. When a customer is willing to pay but finds that you have nothing to sell, he/she may decide to go looking elsewhere. Losing clients is a big no-no for any business regardless of type and size.
Mismanagement of inventory can also result in overstock, in which case you have much more stock than you need. This is also an undesirable situation because storing items that you won’t need in the near future is a bad idea. As mentioned before, products can become unsaleable if kept in stock for too long. On top of this, there is the hassle of disposing of bad stock which incurs additional costs.
An effective inventory management system should guard the business against both types of situations by helping it maintain just the right amount of stock. It should be able to predict how much the business needs to keep in stock at a particular time, based on past sales figures. It should also be able to track inventory costs, forecast demand and decide the maximum and minimum inventory that the business can afford to maintain.
How QBO helps you manage inventory
Users of QuickBooks Online have access to reports that compile figures to provide information about sales, purchases and inventory. These reports are useful not only because they fill you in about the past and present situations, but also help you make predictions about the future and better manage the inventory.
Inventory Valuations Summary
It summarizes key information, such as quantity on hand, value, and average cost, for each inventory item. This is the quickest and simplest way to find out how much stock you’ve got.
Inventory Valuation Detail
This expands upon the previous report, listing the transactions that each inventory item is linked to and shows how the transactions affected quantity on hand, value, and cost.
It lists the products and services you sell along with detailed information about each: sales price, name, description, and (optionally) purchase cost and quantity on hand. It is different from the inventory valuation reports in that it shows all the products and services on sale, even the ones on which you’re currently out of stock. The knowledge of what is missing is just as important as knowledge of what you have.
Purchases by Product/Service Detail
This report groups your purchases by the items in your Product/Service List.
Sales by Product/Service Summary
It summarizes sales for each item on your Product/Service List with columns for quantity, amount, percentage of sales, and average price.
Sales by Product/Service Detail
This is a detailed version of the previous report, showing individual transactions with additional information such as the name of the client and description of the product/service sold.