At the end of every year, a business owner would walk through his warehouse and say, “We have $2 million dollars of inventory on hand”. He did this every year without actually counting anything or actually knowing any kind of values. So, every year the company paid taxes for whatever the owner decided the value of his inventory was worth.
Later on, the same owner bought inventory management software for his business. The same company went from $2 million to $5 million of on-hand inventory a year. They did not dramatically increase their purchasing, nor was there a drastic change in the company’s sales.
So where did the additional $3 million worth of inventory assets come from?
When the company added an inventory management software program to their operations, the business was able to know the accurate quantity and value of inventory on hand — they were finally able to keep track of their inventory assets. The company was able to keep track of all purchases, all sales, and know real-time inventory levels.
Before getting software, the company didn’t actually track their inventory. The owner had been going into the warehouse and picking an on-hand inventory number out of thin air to pay taxes on. With an inventory system in place, the business was able to know the true value of their inventory, which also enabled them to properly plan for future inventory needs.
3 reasons why inventory management is critical for a business
The company mentioned earlier is a real company I worked with to help implement their inventory management system. And their situation is not uncommon — you’d be surprised how often businesses don’t know the true value of their inventory until they put an inventory management system in place.
Knowing your true inventory value is very important for many reasons, including:
Your business pays taxes based on your inventory asset values. If you were to get audited, you would have to prove what you had in your books. If an auditor came into your business, they would want to see documentation. If you’re just pulling a number out of thin air, then there is no documentation you can provide. However, if you have an inventory management system, you can run a report with all the necessary information and you’ve got the proof right there because you’re posting all of the transactions in the system, giving you accurate numbers.
In order to know what profit your business is making, it’s necessary to know your inventory values, such as inventory on hand and product costs. Without tracking this information, you won’t be able to know those numbers. You could be paying commissions to your workers on costs that are not true.
(3) Damages & Losses
On a similar note to understanding your profits, inventory management is important in knowing your damaged and lost inventory. You may remember that you have ten of a certain product on hand. If you were to go to the warehouse and there were only two of that product, the discrepancy and lack of visibility becomes an issue. It could be that the items were damaged and nobody posted an inventory adjustment or you may have issues with misplaced or stolen inventory.
However, these are just three of the many reasons why having an inventory management system in place is critical for business operations. In addition to providing traceability and visibility, proper inventory management practices are necessary in ensuring overall business success as it affects other areas such as accounting, purchasing, and sales. The benefits of having a powerful inventory management system are numerous.
For more articles and resources on inventory management, check out Acctivate’s blog, where we discuss inventory, supply chain, business management, and more.
Lauren Stine – Guest Blogger – Manager of Implementation at Acctivate
Lauren Stine is the Manager of Implementation for Acctivate Inventory Management Software. Armed with a Bachelor’s Degree in Accounting, Stine’s extensive knowledge and background allow her to finely blend accounting expertise with technical skills and support. She has been working directly with customers to train them on Acctivate Inventory Management Software since 2012.