Why Accurate Inventory Management is Essential for Small Businesses

Updated: May 2021, August 2021, January 2022

54% of small businesses have identified cash flow issues as a major bottleneck to growing their business. 76% depend chiefly on cash flow generated from operations to grow and survive. And a further 70% concur that poor cash flow presents the greatest threat to their companies. 7 in 10 companies are said to be hamstrung by poor cash flow. The main challenge accruing from poor cash flow is the inability to pay suppliers on time.

Whilst loans, debt or equity led financing, credit cards are options most small businesses explore. Inventory and/or stock management tools can help them with optimising (in most cases reducing) cash flow issues

This article explores how Inventory Accuracy can reduce cash flow issues over time.

Interdependent: Inventory Management and Cash Flow

Companies usually rely upon inventory for the purposes of operating and filling their client’s orders. Inventory is key to assisting companies with tasks like staying within budget and planning. Therefore, it is vital for businesses to maintain precise inventory records. Accurate inventory is a chief management tool offering many benefits, including improving cash flow, in the following ways.

Ondemand View of Your Inventory Levels: Protecting you from losing sales and managing customer expectations. Keeping your stock levels up-to-date will allow you to reorder when your product hits a minimum threshold level.

Reduce Cash Hold-up Risk: Valuable resources are at the risk of being tied up because of non-selling or slow-moving items. A precise inventory will expose these products, allowing you to proactively put them on sale and avoid automatically reordering them.

Eliminate Unknown or Ghost Inventory: Improve your inventory efficiency by being aware of the location and amount of products you are holding. Avoid wastage of time and resources that goes into employees looking for those products that are already sold.

So, Why Don’t Most Businesses Have an Accurate Inventory System?

One of the top reasons that companies fail to keep an accurate inventory is pilferage and theft. Businesses don’t account for the inventory that is lost to these causes.

Another major reason is unreported product damage. The damaged product could be removed from stock, but because the damage goes unreported, inventory cannot be adjusted accordingly.

Another cause for inaccurate inventory is errors in receiving incoming delivery. With receiving turned off, the procedure is flawed from the very beginning. Identification and labelling issues also account for inaccurate inventory. When inventory isn’t marked correctly, nor entered within information systems, errors arise.

Retaining a manual, paper-centric picking system can create many errors in inventory. It is much more manageable to shift to using barcodes, light directed or RFID systems.

Human error accounts for much of the inaccuracy found in inventory. These errors could be caused by insufficient training, attitude, speeds of operation, process issues, picking schemes and others. It might seem convenient to blame order pickers, but the real causes are often deeper, more systemic than that. Disorganisation and confusion at pick locations result in inaccurate inventory too.

A faulty receiving process, devoid of the right safeguards can also result in faulty inventory. You could have an incorrect bill of materials, or perhaps a flawed procedure for checking them.

Perhaps the biggest enemy of accurate inventory is the absence of cycle counting. Lastly, not taking into account the transactional delays can cause inaccurate inventory.

How to Adopt Accurate Inventory Practices

Maintaining accurate inventory must become part of your business culture, much like customer service and quality management. It must be advocated throughout your company, being everybody’s responsibility, starting at the top.

The best process of taking accurate inventory must be clearly defined so as to minimise faults and errors. Please appreciate that taking inventory is very specific to your business. Replicating successful inventory taking processes may not always work.

Document as clearly and comprehensively as possible the process that is to be adhered to by employees to maintain inventory accuracy, including the correct procedure for filling out paperwork. Distribute this documentation to a few key employees in the beginning, and, once the process is finalised, have it distributed to everybody.

Train and test the employees on the procedure. Make sure they are familiar with the process document, and that your actual process doesn’t diverge too much from the process that has been laid down.

Count your inventory regularly (cycle counting) to ensure high levels of accuracy.

Most importantly, be prepared to reevaluate your processes and procedures. Make periodic changes to your process documentation to make it more efficient.

Cash Flow Implications of Accurate Inventory

An accurate inventory will help you with cash flow because you can negotiate cost and payment terms depending on the frequency and volume of your sales. For example; If you sell widgets faster than bottles then you need different payment terms for bottles – for widgets you can possibly pay faster and for bottles you will need more time. Also, reordering can be managed tightly, you can sell bottles as delivery only sales instead of stocking them.

Accurate Inventory will improve your customer’s experience, allowing you to quickly answer customer queries when they call in to inquire about the availability of various products. This will mean you can deal with more customers, ultimately translating into greater profit.

Accurate Inventory provides a proven framework to keep more cash in your business, either by ordering only fast-moving products and/or negotiating appropriate payment terms – ultimately reducing cash related catch22 moments.