Here’s How Much To Invest In Inventory For Your Business

There’s a very fine line, easily crossed, on how much inventory should you carry. The ratio should be between the regular demand of your clients and the extra stock you could have, but having an average can be a headache if you are starting or you don’t know your business to the core.

Having a well-balanced inventory is a matter of profit. Too much on the shelf can make you lose money, after all, it’s a product you already invested in and It’s not generating returns. Too little could get you into trouble to supply all of your clients and, in so, losing business. Especially if your inventory has an expiration date.

There are different paths you can take to have the best inventory strategy for your business. A good way for you to never run out of goods is to explore the possibility of having small business financing to meet the demand.

But before you go on a crazy manufacturing spree, there are some things you need to know first.

What to take into account?

Many nuances mark the velocity and recurrence of demand in products. So, if you are trying to figure out how much do you need in stock, pay attention to:

• Past orders of the month/year. That is if you already have historical data.
• Seasonality. Cocoa ingredients will sell more in the middle of the winter than in summer.
• Current market. If your competitors aren’t doing so well, a good bet is that you won’t either.
• Abnormalities. Sounds worse than it is, you need to have more inventory if you are going to have a sale because the idea is that you sell more than in any “normal” period.

Having a good understanding of your market, your sales prospect and strategies will give you the magical number you are looking for. But remember that, at least at the beginning of your business, you’ll have to recur to try and fail to test.

Start small and do a lot of data mining (on or offline) to understand your consumer and its needs in specific times and geographies.

Though there isn’t a magical formula to know how much inventory you should carry, there are formulas that can help you understand costs and, in so, create the Key Performance Indicators that allow you to set your strategy to those goals. For example Inventory Turnover Ratio, that will help you realize how many times have you replenish your inventory.

Cost of Goods Sold (COGS) / Inventory = Inventory Turnover Ratio

A second formula is the Days Sales of Inventory, to know how much your sales average:

364 (days in the year) / Inventory Turnover Ratio = DSI

With this in mind, you can set up a strategy to have just the right amount of inventory in-store.

Why shouldn’t you have more than you need?

As said before, it’s a matter of profit. Your business needs cash flow to continue operations and having money collecting dust on a shelf will stop you from reaching your full potential.

But also, it could be a red flag as to how the market is performing and, in so, how well is your business doing. Antibacterial gel is flying off the shelves the minute it’s placed there, but before 2020 and the pandemic, it wasn’t an item that everyone bought. Imagine the amount of money lost if these companies would have produced as many ounces as they do today.

The most important thing is to have an ear to the ground to know what your consumer wants at the moment that they want it. Another example that fits perfectly in the fashion industry. With trends changing as fast as they do, a retail business could end up without fashionable clothes and accessories that no one will buy anymore.

To make sure that you can supply your customer’s demand, have an extra cash flow stored away or use small business financing to meet your orders. A single bad experience with a company can change your idea of their good work so don’t let this be your case.

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