When Dell started selling laptops, they revolutionized the inventory system for an entire industry. They started making computers right after getting an order online. Thus, cutting down the cost of inventory altogether. One of my friends started selling hand crafted items on Etsy. I was talking to him the other day about his business strategy. But, that for another day. In this post let’s talk about how managing inventory the right way can make your business save more money and become more profitable.
At the early stages of eCommerce business planning and development, you need to spend a lot of time in developing product lines and testing your products. It may take some experimentation to find the right suppliers and figure out what will sell at a good profit.
Once your online store has been active for a while, however, you will probably have these issues settled. There’s always room for improvement, though. If you know what your successful product lines are and you have your processes for making new products down fast, it’s time to start analyzing your inventory patterns.
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Poor inventory management can cost your business money, and it can cost you time and create extra hassles. Getting inventory right is an important next step for your business growth and success.
Why Inventory Management Matters
Managing your inventory isn’t just about having the right supplies and products on hand. If your business is based on making and selling products, your inventory affects every part of your business. You need to understand your inventory in order to make wise business decisions.
For example, if you run out of a product, you risk losing profit because you can’t sell items until you restock. But if you have too much inventory, you are tying up a large part of your cash flow in those goods, which limits your ability to make quick changes in your product lines or handle unexpected expenses.
You need to understand your product and sales cycles well enough to have the right amount of inventory on hand, so that you will neither lose potential sales nor limit your ability to react to new situations.
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Understanding the Cost of Goods Sold
This metric has to do with what it costs you to turn raw materials into saleable goods. The things that go into making this calculation include your time in sourcing and producing the items you sell, as well as any time or money you spend in stocking and storage.
This calculation needs to be made at least once per year for tax purposes, but it is actually a useful calculation to keep tabs on throughout the year as well. You need to be able to determine the total cost of a finished item that you sell, which is more than just the price you pay on raw materials or on wholesale goods.
When you know your total cost of goods sold, you may be able to lower those costs by making changes in your inventory or production process. It will give you guidance for where you need to make improvement in your business, whether you need to work on how to reduce inventory on hand or how to make your production processes more efficient.
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Good inventory management includes knowing what inventory you need to have available and understanding the costs associated with that inventory. When you understand these principles, you will be able to make your business more profitable by reducing your inventory costs while maintaining or increasing your level of sales.
If your business requires inventory, this is one important place to tweak your business for greater success.