Proactively addressing potential issues in your business can prevent future problems, and inventory is especially important, as it is your biggest asset and represents a significant investment of company cash. 
First, what is inventory? Inventory is your … stuff. The stuff you have to make things, the stuff you sell, the stuff you use to run the office – basically, all the things that you use in your business to generate revenue.
Here are two tools to evaluate efficient inventory management.
Inventory Turnover Rate
This is the cost of the goods sold divided by the average inventory – that is, the beginning year balance plus the end of year balance divided by two. Calculate this figure by the month if the figures are available. Low turnover means that extra costs for insurance, storage, and administration will be incurred while increasing the chances that inventory items will become obsolete while tying up all-important cash. Aim for a turnover over rate that isn’t too high to sustain but that is high enough to prevent those extra costs from incurring.
Number of Days' Sales in Inventory
Divide year-end inventory balance by the average daily cost of goods sold; this will tell you how long it takes to buy, sell, and replace the average inventory, illustrating the effectiveness of your company’s inventory control.
Efficient inventory and purchasing policy management are of utmost importance when running a business. Careful attention to both will prevent both overages and shortages, prevent obsolescence and profit loss, and prevent unhappy customers.
Implementing good inventory management software offers great advantages in the process of managing your inventory; for more information about how Oates & Company can assist you in selecting the right software for this purpose, contact us today.
