Surprisingly, many business owners are overlooking a very important part of their business: tracking and recording their inventory. Did you know this common mistake costs retailers over $1 trillion annually? Without an accurate view of inventory levels, your business is at risk for stock-outs, unnecessary holding costs, overselling, and potential overstocking.
Maintaining accurate knowledge of inventory levels and keeping them at an optimal level is key for staying in business and becoming a profitable one. A small error in tracking inventory could spell major trouble for you and your business. For a business to thrive, it is essential to find the ideal level of inventory where it can sufficiently meet demand without under or overstocking.
When it comes to tracking inventory, it is important to answer the following question for your business: how do I most efficiently track and report my inventory to make better decisions to generate sales and higher profits? With this in mind, we have compiled a list of the top inventory reports you should be using.
1. Overall Inventory Performance:
To understand the health of your business, it is essential to know the profitability of your products to ensure it’s performing at a maximal level. To measure inventory performance, you will need to compare to data previously collected. Analyze different metrics such as:
- Inventory turnover: Inventory turnover measures the number of times inventory is replaced in a given period. The higher the rate, the less time inventory sits on the shelf. The formula is: cost of goods sold/value of your average level of inventory.
- Inventory accuracy: Regularly counting inventory ensures all inventory is accounted for and there is no “phantom” inventory in the mix.
- Item fill rate: This is the percentage of products from a customer’s order your company could ship. The higher the item fill rate is, the better the inventory performance is.
2. Inventory Control:
Knowing how much inventory you have at any given time is vital for a successful business. Inventory control reports will show how much inventory you have on hand. Efficiently controlling inventory ensures your capital is being used in the best way possible. Use one of the following methods to report:
- Codes: Such as barcodes can allow items to be counted and tracked. This can be a time-consuming process depending on your level of inventory.
- RFID: Radio Frequency Identification allows for inventory to be scanned by a handheld scanner. This is a more time-efficient method.
- Stock book: A good option for a small business with few items. Stock books track inventory manually by entering when inventory comes in and when it goes out.
- Stock cards: For businesses that are looking for a more complex system. Each type of inventory has a card that contains information such as description, value, location, supplier details, etc.
Anticipating the demand for your product is essential to ensuring success. Projecting sales for the future and matching inventory levels to meet anticipated demand can ensure you have an optimal amount of product on hand at all times to avoid stock-outs and overstocking. Understand the following variables to be able to accurately forecast inventory:
- Lead time demand: Lead time is the time from when you place an order to when the inventory arrives. Calculate lead time demand with this formula: lead time (usually in days) x forecasted daily unit sales.
- Safety Stock: Safety stock’s formula is: lead time demand x 50%
- Reorder point: Know when to order more inventory with this formula: lead time demand + safety stock
Knowing the most and least valuable products is essential to properly managing your inventory This report will help you decide what items to reorder, to stop stocking, and to stock more of. With an ABC Analysis report, items are categorized as “A” being the most valuable and “C” being the least valuable. Conduct an ABC Analysis report by following these steps:
- Figure out the annual consumption value for each item with this formula: (annual demand) x (item cost per unit).
- Annual demand = how many units needed per year
- Items with the highest annual consumption value are labeled as “A-items”. These items are about 10-20% of total inventory while accounting for about 70-80% of total annual consumption value.
- “C-items” have the lowest annual consumption values, with about 50% of inventory making up less than 5% of the annual consumption value.
- “B-items” are everything in between.
Inventory valuation reports show costs associated with obtaining, holding, transporting inventory, and ensuring inventory is in proper condition to sell. This allows your business to properly measure the cost of inventory on financial statements. To assign costs to inventory, use one of the following methods:
- Specific identification: tracking the specific cost of individual items of inventory
- First in, first out: assume the first items to enter the inventory are the first ones used
- Last in, first out: assuming the last items to enter the inventory are the first ones to be used
- Weighted average: the average of the costs in the inventory is used
Importance of Inventory Reports
Using inventory reports and having accurate stock levels is essential to tracking inventory. With the knowledge gained from these reports, you can make more informed business decisions. Implementing these inventory reports has the potential to:
- Decrease stock-outs
- Increase sales
- Increase inventory turnover
- Lower costs
Need help managing your inventory? Ecomdash offers an online inventory management software that is designed to save time, eliminate overselling, and help grow your business. Sync inventory across multiple channels, set up custom alerts to notify you of low inventory levels, seamlessly connect the dots between suppliers and fulfillment centers, and more.
Editor’s Note: This blog post was originally published September 2017 and was updated in February 2021 to reflect more accurate and relevant information.