Nice Accounting Adventures: Inventory Management
How much inventory is too much? What happens if you have too little? You have questions, we have answers!
FACT: Clipboards have all the answers to life.
All good things must come to an end, and our Accounting Adventures series is no exception. This article, part 4, will be the last one of the series.
Yes, we know that is very sad. And no, we didn’t realize just how fun these accounting adventures would be.
But always remember: the real adventures are the memes we’ve made along the way:
Pictured: People who don't read our Accounting Adventures series
Today we’re getting into the nitty-gritty of inventory management. We’re answering your burning questions in these three areas: 1. Buying Inventory; 2. Days of Inventory on Hand; and 3. Inventory Management Systems.
As is tradition for this series, we have partnered with Accountfully, the experts in all accounting-related things, but especially when it comes to eCommerce-related accounting. We’re big fans and so grateful for their partnership these last 4 weeks!
1. Buying Inventory
Does he have enough inventory? Why is he orange? We can answer at least one of theose questions
When it comes to the art of having the right amount of inventory, there are two important concepts that you must master: Sales Velocity and Reorder Points.
Sales Velocity is, quite simply, the speed at which products go through your business. You can use Sales Velocity to get an idea of how much your company might earn during a specific period of time, and also get an estimate of the appropriate amount of product to order. Here is how Sales Velocity can make a difference for you:
- Helps you plan for the future
- Gives you an idea of where you stand
- Helps you avoid ordering mistakes
- It can help you grow your business
The other important concept to master so you are on top of your inventory is Reorder Points (ROP). This refers to the level of inventory which triggers an action to replenish that particular item. Figuring out your ROP will help you ensure that your inventory never reaches zero. Here are just a few advantages of knowing your ROP:
- Minimize costs. If you are storing excess inventory at a faster rate than it can be sold, that is not a good use of your precious capital.
- Minimize stockouts. On the other end of the spectrum, having too little inventory can lead to stockouts, which are very harmful to your business.
- Better forecasting. The more you calculate your ROP for each product, the more accurately you can forecast demand in the future.
2. Days of Inventory on Hand
This refers to the average number of days required to sell the inventory that you currently have on hand. It can be calculated with a simple formula:
The days of inventory on hand should match the time it takes to sell through the product while you reorder more. You should remember to always have some safety stock readily available — this will ensure that you don’t ever blow a sale and disappoint a customer.
That last point cannot be stressed enough. In the past, the goal of knowing your days of inventory on hand was simply to try and reduce stockout days as much as possible. But these days, with so much competition, and with the expectations of customers so high, your eComm store should be doing everything possible to avoid stockout days.
Consider this advice from Nice Commerce’s CEO and fulPHILLment expert, Phill Civitella:
“Always aim to keep 3 months of inventory on hand. This allows you to be lean with your goods on hand, as well as keep a good buffer for any unexpected high velocity fulfillment days or last minute wholesale orders. Take into account additional constraints due to the current climate in the world of Supply Chain.”
3. Inventory Management System
The cirlce of (Inventory) life.
If it is starting to feel a bit overwhelming to hear all that you need to do to stay on top of your inventory, you are not alone: it may seem like a lot because it IS a lot.
But there is help out there! An inventory management system can help your business map out all those details, and automatically log them so you can easily access all that integral inventory information (yes, our writing is always altered for alliteration maximization. You are welcome).
Using an Inventory Management System can be a huge help if you:
- Sell multiple SKUs across many channels
- Are not clear on COGS, or want them to be more defined
- Depend on a complex supply chain, lots of raw materials, or a complicated manufacturing process
- Need a higher level of reporting
- Have a number of different fulfillment locations
- Have multiple team members involved across each step (purchasing, selling, etc.)
- Want to create more efficiencies in processes and automations
Phill’s advice on when to consider implementing an inventory management system:
“As soon as you get serious about your brand and your business, you should implement an inventory management system. Doing the legwork up front sets process for future state. Accounting for POs, sales, and returns while you’re scaling your business can cause a lot of undue heartache. This will pay dividends on the long term!”
Not bad, huh? As Shakespeare said: Get thee to an inventory management system ASAP, you fools! (or it may have been Gandalf?).
Congrats! You made it to the end.
So there you have it. The accounting adventures are over. Truly the end of an era.
We sincerely hope you found some useful information, and feel better prepared to deal with your accounting needs.
But the adventures don’t stop here! Please reach out and let us know which other eComm topics you would like us to cover (unless, of course, you are happy to stay a “proficient in excel” uncultured clown. In which case we award you no points, and may the Lord have mercy on your soul).
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