Inventory management can be one of the most difficult and costly aspects of running a business. Keep too little inventory on hand and you run the risk of upsetting customers. Keep too much, and you might run out of cash. Your goal for successful inventory management is to know the optimal items and quantities of each to keep on hand. Here are some ways to stay on top of your inventory balances: Know your inventory turns. Use this ratio to answer the question, “How many times a year does each item move through inventory?” To compute inventory turns for each item, divide the Cost of Goods Sold by Average Inventory on hand. Ideally, you want to see each item turning more than once a year. Any item that turns less than once a year is adding to your cost of doing business. Review your inventory costing method. Sage 50 supports the following costing conventions: LIFO (Last in First Out), FIFO (First in First Out), Average Costs, and serialized inventory. The determination of which option is best for your business should be made with the help of a tax accountant, as the decision has a direct impact on your tax liability. Generally for items with increasing costs, LIFO costing will result in the highest annual costs of items sold and therefore the lowest taxable income. Its use requires an election on your tax return as well as an agreement to use the method for both book and tax purposes. Look at trends. Compare your year over year growth in Cost of Goods Sold (COGS) with your year over year growth in inventory. If your inventory growth exceeds your COGS growth, you are probably feeling the pressure in your bank account. Consider reducing future orders from your supplier or liquidating any inventory that has been on hand beyond a year or your industry norm. Review profitability by item. Use your Sage 50 inventory profitability report to review the profit by item. Consider changing your product mix to increase the sales of your most profitable items. Use drop shipments where possible. Rather than carrying all of the goods you need to fulfill orders, consider having your suppliers drop ship items directly to your customers. Sage 50 invoicing is designed to manage these types of transactions for you. Be sure to check the box indicating drop shipment handling. Review your supplier payment terms. If you are paying your suppliers faster than you are receiving payments for sold items, you may be creating a cash flow bind. See if you can extend your payment periods with your largest suppliers. Monitor open Purchase Orders. You need to make sure you are considering any open POs or unbilled invoice receipts when you are reviewing inventory quantities on hand. Know and automate your reorder points. Use Sage 50s reorder point fields to keep tighter control of your inventory replenishment process. Make sure you have also tracked the lead time between orders of your various suppliers. Use barcodes to track your items in your warehouse. Consider adding barcode functions. Contact Coreims.com for information about inventory add-ons available for Sage 50. Take a physical inventory at least once a quarter. If you find that your annual physical inventory count is off by more than a few units, you may want to increase the frequency of your counts. It is generally easier to locate a discrepancy (and remember the details) over a shorter period of time. Once you improve the accuracy of your counts, you can gradually extend the length of time between counts. By taking control of your inventory on hand, you can gain control of one of your largest business assets. Use a combination of reports and ratios to gain insights as you go, and use physical counts to verify that activities in the warehouse are being properly managed. Once you have everything under control thanks to the depth of features available in Sage 50, good inventory management will positively impact all three financial statements – your Income Statement, Balance Sheet and Statement of Cash Flows. By: Geni Whitehouse
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