June 11, 2015
One of the keys to profitability when selling a retail product is inventory control. Software companies want to tell you to purchase their software saying that it will provide a platform for controlling inventory. And most software products do. The problem is that in practice, I have never actually seen one provide reasonable numbers.
It’s not because the software is a bad product. The problem is that inventory by its very nature does not work well in a virtual environment. Inventory does things like get stolen, spoil, become obsolete, and go out of style. There is no computer system that can magically account for any or all of these factors on its own. In twenty-five years of doing this, I have never seen a virtual inventory that was correct. How many times have you ever looked up a particular item on your system when the computer says that you have ten. You go back to get one and there aren’t any.
Its just the nature of the beast. Sorry. This is just how things are.
The only way to properly control inventory is with a hands on approach. A software system can point you in the right direction, but it will never be a complete cure all for your inventory control issues.
This is the total number of times in a year that the entire vale of your inventory is sold. If you have $100K in inventory at cost, and in a given year you sell a total of $600K in inventory at cost, then you are currently turning your inventory six times.
Why is this important? Because if you turn your inventory more rapidly and maintain your margins, you will become more profitable. What is an optimal inventory turn ratio? That depends on your product. If you are in the business of selling fresh fruit, you should probably turn your inventory a lot more that six times per year. If you don’t, most of what you sell would be spoiled. If you are an aircraft retailer, you will probably turn your inventory much less than six times per year. It all depends on your product category. But faster turns with solid margins usually equal higher profits.
Inventory Costing Methods
There are many, almost too many to count. But the method most commonly used and accepted by the taxation agencies is Lower of Cost or Market.
Here is an example of how it works. Let’s say that we are in the used car business. We buy a vehicle for resale for $10,000 and pay a towing service $100 to get it to our lot. There are some repairs that are necessary which cost another $2,000. So our inventory is currently valued at $12,100. But we look in the auction catalog for a similar vehicle and see that the last one sold at $13,500, so we need keep our value at $12,100. This cost is The Lower of Cost or Market. The car sits on our lot for four months and doesn’t sell. Every week that a used car sits on a lot it goes down in value. At the end of the four months we look in an auction catalog and see that a similar vehicle just sold for $11,500. We must then do an inventory write down to $11,500 or The Lower of Cost or Market.
Again, no software product is gong to magically solve all of these problems for anyone on its own. What you need is a decent Small Business Accountant to protect you, your family, and your business. If you have difficulties with Inventory Control, Inventory Turns, and Costing Methods Chicago Illinois, we’d love to help.
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