Every organization that is engaged in production, sale or trading of products holds inventory in one or the other form. While production and manufacturing organizations hold raw material inventories, finished goods and spare parts inventories, trading companies might hold only finished goods inventories depending upon the business model.
Inventory is a necessary evil that every organization would have to maintain for various purposes. Optimum inventory management is the goal of every inventory planner. Over inventory or under inventory both cause financial impact and health of the business as well as effect business opportunities. Therefore, inventory planning and control are necessary functions that business owners usually perform relating to inventory management. Business owners pay close attention to inventory as it usually represents the second largest expense in their businesses. Inventory planning includes creating forecasts to determine how much inventory should be on hand to meet consumer demand. Inventory control is the process by which managers count and maintain inventory items in the business.
Why Inventory Management is Necessary?
- Better Cash Flow- Inventory planning and control can help companies manage cash flow. Small businesses do not have large capital balances for purchasing copious amounts of inventory. Business owners implement policies and procedures to limit the amount of money spent on inventory. Cash flow improvements also come from purchasing the lowest cost inventory available in the business environment. Not only does low-cost inventory save the company money, but it also allows companies to develop a cost advantage in the economic market.
- Higher Profits- Business owners can use inventory planning and control to generate higher profits. Purchasing the right type of inventory to meet consumer demand often leads to higher business profits. Companies who sell through their entire inventory multiple times each year also increases business profits. Inventory planning and control procedures can also limit the amount of obsolete inventory in the company.
- Limits Abuse- Inventory policies and procedures prevent employee abuse of inventory. Loose work environments can allow employees to steal inventory items for personal use. Stolen inventory results in a financial loss for the company. Employees can also use a company’s inventory items in the workplace for personal reasons. Previously used inventory may be unsellable depending on the company’s operating industry. Proper employee behavior is a significant factor relating to inventory cash flow and profitability.
Business owners should consider implementing business technology and inventory management system to help manage inventory. Technology usually helps business owners spend less time on inventory planning and control functions. Even, inventory management software provides business owners online methods to order, receive, manage and sell inventory. Spending less time on these back office functions allows business owners to remain at the forefront of business sales in increasing their company’s profitability.