To make sure whether your company is on the right path to success, it's critical to regularly analyze it. Managing your stock is among the most crucial aspects of your company. How well-managed are the inventories in your company? When you required them, did you have the correct items on hand? Did the absence of inventory cause you to lose customers? Or did too much stock cause you to make a loss? In this post, we will go through the fundamentals of stock management.
Did you know? The value of excess inventory commodities worldwide in 2015 reached $470 billion.
What Is Stock Management?
Let us first look at stock management meaning. Buying, warehousing, monitoring, and keeping an eye on inventory levels are all part of stock management, also known as managing inventory or stock control. Everything your company uses to make its items, from raw resources to final items, is covered by this rule. The goal is to always have the appropriate amount of merchandise available for purchase. In addition to minimizing costs, effective stock management can assist entrepreneurs in determining when to place new orders for supplies.
Also read: Meaning of Accountancy and How it Differs From Accounting
Why Is Stock Management Important?
The importance of stock management one can attribute to two basic factors:
-
Improves Business Cash Flow
Since stock is just an investment that locks up some cash flow for businesses, great stock management is crucial. A commodity that your company has already paid for stocks. When you're not trading it and not receiving any payment, it's merely occupying space in your storage room and not being converted into money that your company can use. Efficient inventory management will enable the company to generate some cash for using it in other areas of business functions. Because of this, inventory control is crucial to managing cash flow. You need to be responsible for keeping track of how much inventory you presently have, by when you will run out depending on anticipation of future orders, and when to refill it if you want to be effective. In doing so, you'll make absolutely sure that you may have additional money in savings than isn't reliant on inventory. So keep in mind that improved stock management increases cash flow!
-
Saves You Money
A further crucial benefit of effective stock management is the reduction of costs for your company. The needs for your goods must be precisely predicted and foreseen by your company. Making ensuring you have adequate inventory to fulfil customer demand depends on this. You can prevent conditions where you make a loss due to goods being out of inventory or whenever too many funds are spent on surplus inventory that is overflowing in the warehouses by practising smart inventory management. By preventing product spoiling, inventory management also assists in cost savings. If the things you offer (such as food, beverages, or cosmetics) are volatile and have an expiration date, they risk going rotten if you do not sell them on time. These spoilt goods won't bring you any money because no one will buy them. Dead inventory, or goods that you cannot sell because they have fallen out of favour or are no longer applicable, you can also avoid such situations. In essence, effective stock management helps you save a lot of money.
Ways to Categorise Your Stock
There are four basic stock kinds that your company might use.
-
Raw Materials
Elements that the factory uses in the production of products
-
Work in Progress
These are the items that are still in the process of production.
-
Finished Goods
The goods which are ready for selling
Also read: Accounting Period - Definition, Types & How Does an Accounting Period Work?
-
Consumables
All the items which the company uses to run the production every day like stationery, electricity, gas, etc.
It is crucial to categorize your inventory so that it is simpler to maintain records of what items you require to replace. Alternatively, if you have a limited amount of liquidity, you could finance the most crucial one first.
How Can You Manage Your Stock Effectively?
How can you handle your stock effectively knowing that you are aware of how important it is? We have some great advice for you right here!
-
Set Minimum Stock Levels
Setting the "minimum inventory level" for all of your goods is the first and most important step. That's the minimum quantity that must always be on hand, so whenever it drops underneath the predetermining level, you understand it's time to place an order for more! Depending on the industry and the need for your items, the minimum inventory range can vary for various goods. You should conduct a study and decide what amount is appropriate for your organization before setting the appropriate stable threshold. Ensure to update and verify the level often during the year to compensate for any adjustments because circumstances can evolve.
-
First in First Out
Many companies adhere to the stock management principle known as "FIFO." Therefore, equities that the company purchased initially (first-in) company must sell first (first-out). This is highly helpful to prevent spoilage, wear and tear, or obsolescence of supplies, particularly for perishable commodities. You must store your new items in the backend of the system which makes certain that your current products remain in the frontage for simple access.
Having a Good Relationship with Supplier
Your company needs to be capable enough to move with the times for effective stock management. As a smaller firm, things can alter rapidly daily and obstacles can arise, necessitating last-minute replenishment or swift shipping. In the long term, it will be beneficial for you to keep a solid relationship with your provider. They'll be more eager to work with you to resolve any replenishment issues, give you better goods, work out minimum purchase numbers, and perhaps even negotiate cheaper costs.
Also read: Perpetual Inventory System - Methods, Advantages and Disadvantages
To have a solid relationship with suppliers, you require apparent two-way communications. Inform your suppliers anytime a change is anticipated so they can alter their manufacturing (for example, a sudden spike in orders). In exchange, they need to inform you if a shipment is going to be late such that you might take precautions against running out of inventory. If at all feasible, try avoiding informing folks at the last moment because doing so only puts more strain and stress on both sides.
-
Have a Contingency Plan
Risk management frequently uses a backup plan to get ready for potential future situations or incidents.
The following problems with stock management are just a few examples:
- Unexpectedly high sales cause you to run out of inventory
- Lack of available storage space
- Inaccurate inventory calculations result in having too few things to sell
- Insufficient financial flow to purchase stocks
- When a vendor goes out of inventory, you still have requests to fill.
- Late stock shipment
Since it's difficult to forecast when such issues will arise, it's best to take precautions now rather than later. Consider your response, the measures necessary to remedy the issue, and the best way to reduce the impact on some other aspects of your operational processes. Whenever a catastrophe does arise, possessing a pre-planned reaction approach can save you energy/cost.
-
The Importance of Accurate Forecasting
Demand prediction accuracy is the most important factor and the foundation of stock management. It's important to maintain a healthy balance between having enough and too little stock. Given all the potential obstacles, this is a tremendously difficult task. Even though it's impossible to find an identical match, you must make an effort.
When properly forecasting needs, you must consider the following factors:
- commercial trends
- It should be compared to sales in the same period last year.
- the annual growth rate
- Seasonal elements
- Economy
- future promotions
- spending on advertisements and marketing
- Political aspects
- social movements
- Tech-related trends
-
Quality Control is Everything
Never forget to examine the stock's freshness! This might be as easy as asking your personnel to conduct a brief quality inspection while reviewing your inventory to search for any indications of deterioration. Additionally, thoroughly check the labels on your goods to ensure they are accurate to avoid any errors while stock monitoring and control.
-
Use a Cloud-Based Stock Management System or Software
Search for software a solution that offers you real-time inventory and sales data from the several that are currently accessible. This implies that you have access to the information wherever you are, whenever, and as it occurs.
Also read: Inventory Costs Meaning Explained With Different Types of Inventory Costs
Conclusion
If you want to operate effectively and provide your clients with the service they desire, stock management is critical whether you have a physical store, online, or multichannel company. You won't succeed without using inventory management strategies.
Follow Khatabook for the latest updates, news blogs, and articles related to micro, small and medium businesses (MSMEs), business tips, income tax, GST, salary, and accounting.
