For some businesses, inventory can be one of their largest assets and/or their largest expense. Poor inventory management can make or break a bottom line. Below are some benefits of proper inventory management:
Improves cash flow: Purchasing inventory decreases cash. When inventory sits on the shelf too long it is basically cash not working for you. When inventory sells it does turn back into cash. Proper inventory management helps to determine the fine balance of having too much inventory versus too little.
Better management decisions with accurate financial statements: Proper inventory valuation affects the cost of goods sold, gross profit, and net income on the income statement, and the amount of current assets, working capital, total assets, and stockholders’ or owner’s equity reported on the balance sheet. Incorrect inventory valuation can cause the income statement and balance sheet to be incorrect and lead to management decisions that are based on bad data.
More efficient employees: Proper inventory management means that the quantity of inventory on hand is accurate and organized in the warehouse. Employees do not spend wasted time looking for inventory or determining how much they need to buy so they can fill customer orders more quickly.
Prevent losses: Maintaining proper inventory levels decreases the potential of product expiration, the possibility of inventory damages, and inventory from going out of season.
Customer satisfaction: More real-time understanding of what’s selling and what isn’t allows for infrequent backorders, etc. Not keeping the right mix of inventory on hand can drive customers to other suppliers.
Prevent fraud: Proper inventory management is a form of internal controls. Having proper controls over inventory prevents theft from occurring. No one wants to think that their employees would steal; even less want to deal with an incident of employee theft after it has occurred. The only way to reduce the uncomfortable conversation and potentially costly expense is to take measures to reduce the opportunity for employee theft.