What Every Small Business CEO Should Know about Inventory Management

CEOs of small businesses are generally expected to know a lot about running a business. However, there are some, especially the less experienced ones, who may need to get more acquainted with important matters such as inventory management. For small businesses, being able to properly monitor and manage inventory is a must. The failure to do so can lead to dire consequences.

Small business owners

Inventory Management Is Extremely Important

Good inventory management is a vital part of running a small business. Even service-oriented companies have inventory to manage, although not to a point that requires meticulous attention or the aid of an inventory management platform. Without proper inventory management, a small business will have difficulties determining if there is enough inventory on hand, setting the right prices, deciding on the right time to place orders, and finding out if there are inventory lost to damage or theft. A small business is bound to severely suffer from losses caused by inventory damage, theft, misinformed costing and pricing, and inefficient handling.

Also, knowing special inventory management strategies, like JIT inventory management, can be useful in saving on storage costs, eliminating unneeded storage space, and avoiding downtime costs. There are many inventory management techniques and principles a small business CEO can learn and apply on a business operation.

Inventory Costing and Pricing

Every small business CEO needs to know how costing and pricing works. Although these can be handled by somebody else, it does not make sense for a CEO, more so for a small business CEO, to not be familiar with product costing and pricing. By knowing these, it will be easier to analyze business operations and come up with the necessary tweaks or changes to introduce improvements. It is particularly important to be aware of the computation of the cost of goods sold (COGS) since it is crucial in decision making.

Inventory Management Software Is Also for Small Businesses

Those who believe that investing in a good inventory management software is only for larger businesses definitely got it wrong. Even small businesses should consider investing in a reliable and well-designed inventory management software. There are many reasons why it makes sense using an inventory control system. These include improved accuracy, the tracking of trends, more efficient record keeping, and real-time information about inventory not just on hand but including those that are being procured and ought to be procured.

Inventory Metrics

In addition to the numbers involved in costing and pricing, it is also necessary to be aware of the following metrics in inventory management: gross margin size, inventory levels, item fill rate, cycle time, and inventory turnover.

  • Gross margin size is the resulting fraction/percentage after dividing the total profit (total sales less the total cost of the goods sold) by the total sales revenue. This is an important metric to monitor because it should grow as the business operation expands.
  • Inventory levels need to be properly tracked to make sure that there is enough inventory to address demand and that restocking is done right on time to avoid running out of stocks as well as to avoid having too much that the business ends up having to spend for the additional warehousing. A good small business CEO needs to have a good grasp of how much inventory should be on hand and when to order for new stocks.
  • Item fill rate is the percentage of items a customer ordered that the business is able to deliver. A higher fill rate means better business performance while a lower rate means inefficiency. The goal should be to steadily keep this rate rising as the business grows.
  • Cycle time is the time it takes to process an order, starting from the time when the order is confirmed to the time it has been completed or delivered. A shorter cycle time is better so a small business CEO needs to aim for a shrinking cycle time as this means improving efficiency. But of course, shortening cycle time should never lead to the deterioration of product or service quality.
  • Inventory turnover, usually expressed in percent, refers to the quotient of the cost of goods sold over the average inventory. This metric is used for tracking how quickly inventory is being replaced. A higher inventory turnover means better business operation.

Being a small business is not an excuse to disregard or avoid learning about the important technical aspects of running a business, especially when it comes to inventory management. The good thing is that it’s not difficult learning all of these in a DIY basis, with the help of some online courses and inventory management tips online. Also, by using inventory management software or platforms, it becomes easier to get accustomed to the technical terms and it becomes easier to appreciate what the terms and metrics mean to a business operation. These software may even integrate features like predictive analytics and POS that allow small businesses to be competitive and not be driven out of the retail industry by larger players.

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