Inventory Optimization Strategies: Boost Profitability & Cash Flow

Heather Smith, author of “Xero for Dummies” is back with more insights from industry experts. This time, she interviews top accountants and CEOs for quick and easy tips to change the way you manage your inventory.

For businesses carrying inventory, understanding and effectively managing their inventory is vital to ensure optimum profitability and cash flow within the business. Here are 15 techniques you can use in your own small business, or the businesses you advise to:

1. Adopt a connected cloud-based business management platform with real-time analytics.

An optimal solution minimises data entry and enables the flow of accurate inventory financial information – from the store clerk, through to the purchasing officer, and across to management. This ensures everyone is able to make informed decisions in a timely manner.

2. Update inventory records promptly, so all key staff have access to timely information, and inventory can be managed and re-stocked accordingly.

To stay competitive, businesses need to make decisions fast, and have access to reliable information.

3. Split inventory into different categories and analyse categories separately.

4. Maintain an active working relationship with suppliers.

Suppliers are a partner in your business, and open lines of communication help your business provide goods to your clients at the price and time frame they desire. For instance, a supplier you have a good relationship with may proactively notify you of potential shortages and work with you to devise workarounds to meet customers’ demands, such as liaising with a competitor or seeking different sources. A current trend encourages people to buy products made in their own country, so as a business you may find yourself working with suppliers to source local products. Your discussions shouldn’t just about getting the lowest price; you also need to build a long-term, open relationship.

5. Establish the ability to monitor all aspects of the inventory.

6. Utilise mobile devices where possible.

Train staff on using mobile devices, such as iPads or barcode scanners, so stock movements can be tracked and, in turn, financial records updated in real time. This avoids the drudgery of updating paper stock reports, minimising mistakes and wasted admin time. It’s also good practice to ensure mobile devices are adequate for the task at hand, charging stations are available, and security measures in place to avoid theft of the devices.

7. Deal with slow-moving items to ensure they don’t become technologically obsolete, pass their use-by date, or carry a value that’s greater than what they can be sold for.

Inflation or changes in currency value can affect the perceived sales value of the product, in both directions.

8. Plan an optimal warehouse layout that suits your inventory.

9. Establish re-order quantities and have low-stocks alerts in place.

Assess whether these levels work for your business, and adjust as necessary. Never running out of stock may indicate you’re holding too much stock, while running out of stock may mean you don’t have stock available to meet customer requirements. Be clear on who is responsible for re-ordering inventory.

10. Cultivate open lines of communication internally.

For instance, if a big or unusual sales order is in the pipeline, ensure the sales team have processes in place to notify the purchasing officer and others involved in inventory management. The purchasing department may need to proactively talk with suppliers, for example, or train additional staff and free up space in the warehouse, in anticipation of the order.

11. Plan for the future.

If your current inventory management processes cannot cope with the business growth, they will be a painful bottleneck in your inventory cycle. You need to start preparing now to adopt a solution that can handle your business evolution.

12. Share relevant inventory data, in digestible format, with the business team so they have a holistic understanding of what is happening in the business.

While they have their own role and responsibilities, this knowledge assists them in understanding what the business does, where they fit in the business, and how they can help business sales growth.

13. Maintain up-to-date stock levels, so inventory can be managed in a timely manner, and restocked as necessary.

14. Store inventory safely and securely.

15. Undertake an annual full inventory stocktake, and conduct regular spot-check counts of inventory.

It’s important for business cash flow that businesses maximise the profit they can generate from stock, and move stock in a timely manner. Utilising these 15 techniques will assist the business in optimally managing their inventory.