Small businesses account for more than 50% of employment in the United States, and businesses with at least one employee other than the owner have a surprisingly good survival rate through the first few years. However, only half of those businesses see year five, and just a third make it to year 10. How can businesses struggle so much after making it through the first two years? More often than not, money and incorrectly managing inventory is the deciding factor. A business could be profitable on its income statement and still run out of cash. A balance sheet is a better meter of success than an income statement. Without cash, bills are not paid and doors don’t stay open.
Solving the Problem
Inventory has to be managed properly, and any future investments in inventory must be thought through properly. Inventory is necessary for success, but too much inventory could doom a business. Cash can be turned into inventory quickly, but inventory might never turn back into cash. There is no foolproof way to handle small business inventory management, but the following concepts can be applied to almost any business:
- Know what inventory you have now. Counting your inventory is a good way to help manage and know what you have in stock. Decisions shouldn’t be made until the inventory is accounted for.
- Bring in new inventory in the smallest increments possible. Instead of investing in large orders monthly, purchase smaller orders weekly. This makes the cash flow more fluid.
- Avoid FISH inventory at all costs. FISH stands for “First In, Still Here.” Products might not sell for various reasons. Avoid the temptation to accept a good deal. Instead, buy only what you know you can sell.
- Use an inventory control software package to manage your inventory. Some of these packages can cost quite a bit of money, but a less expensive one should fit the needs of your business. These software packages give you a more holistic view of your inventory, making it easier to manage.
- Use technology to your advantage. Implement a barcoding system throughout your operation; it will help you count inventory quickly and accurately. Barcode labels are cheap, and the technology will pay for itself quickly. Barcodes eliminate manual counting and really save on time.
If you think about it, managing your inventory isn’t so different than buying groceries for your home. People tend to buy just enough groceries to get through a week or two. They don’t intentionally buy anything that might go bad before it can be eaten. Small business owners must remember that cash keeps them alive. Managing expenses and inventory will help small businesses maintain the cash needed to survive.