How to manage inventory

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Modified on 2009/11/18 10:13 by tmkern Categorized as Uncategorized

» How to manage inventory

Are you effectively managing inventory to maximize profitability?¶

Here are some ideas to help.

1. Consider the costs of storing inventory. There is cost in just storing inventory at your or an offsite location. Additionally, there is always a risk of damage or obsolescence. Similarly, theses issues apply to raw materials inventory.

2. Do you safeguard inventory from theft or damage? It is advisable to do a physical inventory count monthly (more often if loss issues exist) and compare to the inventory records.

3. Do you have the appropriate mix of inventory on hand for your sales demand? Closely monitoring anticipated sales will help you minimize inventory costs while satisfying demand.

4. Buying or manufacturing inventory or raw materials before they are needed ties up cash unproductively.

5. Are you managing your purchasing function? Devoting appropriate resources to purchasing can save money on materials and parts for resale. Negotiate the best price and buy in bulk when appropriate.

6. Create an inventory management system. Each product movement must be recorded as an internal use or sale to a customer. A simple inventory management calculation is: Beginning Inventory + Purchases - Sales or Transfers = Ending Inventory

7. If physical inventory count is different from the inventory records, material differences should be investigated and corrections made to your inventory management process.

8. Assess your inventory costing function. Depending on the sophistication of your accounting system, inventory transfers may not be handled well for costing purposes. Another common inventory costing problem is invoicing from a negative inventory book balance (sales were recorded before purchases.) In cases like these, inventory costing will be incorrect. A way to correct for an inventory costing problem is to count physical inventory at period end and adjust the value on the balance sheet. The offsetting entry is to cost of goods sold. This entry should correct both the income statement and the balance sheet.