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7 Reasons how inadequate inventory is killing your revenues

Introduction

Poor inventory management is one of the leading causes of small business failure. Inventory management is simply a balancing act between having too little and too much. The amount of inventory that is "just right" is frequently a changing objective. In addition, demand for various SKUs may fluctuate over time owing to a shift in trends or seasonality. As a result, inventory management issues influence total cost and profitability.

According to the US Small Business Administration, one of the primary reasons small businesses fail is a badly managed inventory system; nevertheless, 46 per cent of small firms with 11 to 499 employees do not have any system to monitor their items. This not only causes production shortages but also harms consumer satisfaction ratings. Other times, businesses discover that they have too many goods on hand, resulting in massive wastes akin to "burning money."

How is poor inventory management killing your revenues?

  1. Low sales- This occurs when you cannot promptly fulfil an order due to a stock-out of the desired item. When this happens, the consumer seeks a different store to make his purchase. The cost of lost sales is determined by the item's price and the order quantity. Having a popular item go out of supply during a peak shopping season may be quite expensive. Many firms keep a bit more stock on hand than they expect to need to protect against the possibility of selling out. It is critical to keep enough supply on hand. A company with a reputation for often running out of goods will struggle to realise its full potential.

  2. Customers seldom look back once they locate a firm that can fill their requests quickly and at a reasonable price. They will continue to do business with the corporation until they have a cause to do otherwise. If you turned these clients away due to a stock-out issue in your inventory, you have lost their recurring business. Each of these lost clients represents a lost source of recurring revenues for your business. As with the preceding point, having a stock-out and losing a large number of consumers during a peak buying season will have long-term consequences for your firm.

  3. Inventory that is not sold wastes money that could be put to greater use. Money might be used to pay workers, debts, acquire additional high-demand products, pay rent, or expand your firm. Inventory frequently has a finite shelf life due to spoilage, obsolescence, material deterioration, or shifting consumer trends. This locked-up money is forfeited if your inventory outlives its shelf life. Therefore, inventory must be controlled in the same way that cash is. This means that firms must precisely calculate how much inventory is required without understocking or overstocking excessively

  4. When compared to cash, inventory and stock are less liquid. Therefore, investing too much money in raw materials, work-in-progress items, and finished goods is bad for your company's cash flow. In addition, inventory will not be able to convert to cash quickly enough to fulfil your business's demands in times of crisis.

  5. Inventory storage is also an expensive procedure. It entails paying rent on large warehouses. In addition, excess inventory impedes warehouse operations or consumes space that could be used for faster-moving products. Excess inventory management also has a labour cost.

  6. It all boils down to this: excellent inventory management gets you closer to optimal inventory levels, which frees up cash in the near run to pay other costs and short-term debt commitments. Furthermore, if you refill inventory concurrently with selling it, you are taking in cash at a pace comparable to what you pay out for the inventory.

  7. Carrying the proper quantity of goods eliminates the need to purchase or lease extra space. Having a good inventory means optimising store space and saving warehouse space.

Conclusion

An ideal situation would be to maintain an optimal inventory level by accurately anticipating demand based on historical data and an outlook of external trends. Effective inventory management assists firms in dealing with fluctuations in demand and balances storage costs with ordering costs.


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