For most makers, managing inventory is a nightmare. Why kill your creative flow with number crunching and organizing?
Well, simply put, inventory is the biggest asset in your company (besides your crafty hands of course). If you forget about inventory management, you’ll never get ahead.
But, if you want to save money and make money, you’ll need to protect that asset by nurturing it in the right direction.
Here are 7 tips makers can follow for profitable inventory management:
1. Drive Sales with ABC
What are your most profitable products? What are your least profitable products? You should focus on selling the most profitable products by ensuring you always have them on hand. That’s where the “ABC” method comes in.
Since some products bring in more revenue than others, you can use an ABC report to give your products different grades:
A = The % of stock representing 80% of your revenue
B = The % of stock representing 15% of your revenue
C = The % of stock representing 5% of your revenue
Simply put, your A stock represents your most valuable and profitable products.
After you know which of your products are A products, you’ll want to keep them at the forefront, ensuring you always have them on hand. That way, you don’t miss out on future sales if someone tries to buy it when it’s out of stock.
On the other hand, your C stock is your stock that’s moving slowly or simply dead stock. You’ll probably want to sell this category of products at a discount so you can free up your shelf space and some cash from your inventory.
2. Create Par Levels
You can make inventory management much easier by creating par levels for each of your products. Par levels are the minimum quantity of a particular product you must have on hand at all times. When your inventory falls below the par level, that’s when you know it’s time to create or order in more.
Par levels can vary product to product. You’ll want to look at your products to see how quickly they’re selling. While setting par levels means doing some upfront research and decision-making, it will systemize your ordering or creating process.
Quick Tip… It’s important to keep in mind that conditions change over time. You should check your par levels a few times each year to confirm that they still make sense. If they need to be changed, simply adjust them.
3. First-in, First-out (FIFO)
If you’ve ever worked in the restaurant industry, you’ve probably heard of FIFO before (pronounced “fee-foh”). It’s an inventory management principle that stands for first-in, first-out. It simply means that the stock that goes in first (your oldest stock) is to be sold first over your newest stock.
This is especially important if you have any products that could perish in any way. Even something like cotton can start to fray, degrade, and deteriorate if left for too long.
FIFO isn’t just important for perishable stock. It’s also crucial to practice it for non-perishables. If you always have the same products sitting at the back, they’re going to start collecting dust. And dust isn’t the most enticing feature of a product they’re considering buying.
4. Last-in, First-out (LIFO)
Similar to FIFO, the last-in, first-out method considers the order your stock moves in and out. Short for last-in, first-out, LIFO assumes the products you bought most recently are to be sold first. LIFO is essentially the opposite of FIFO.
So, why would anyone practice LIFO?
Well, LIFO works under the assumption that prices are steadily rising overall. This means that the product you bought yesterday will be more expensive than the product you bought one year ago. Higher costs today means lower profits, which means you’ll end up with a lower taxable income.
This is the only real reason to practice LIFO – to potentially have a lower tax bill. It’s important to note that LIFO can be a bit risky since your products at the back of the shelf are more prone to deterioration. However, it could work for you depending on your business and your goals.
5. Just-in-time (JIT)
Just-in-time, or JIT is another inventory management method you could use in your business. This method aims to keep the lowest inventory level possible to meet demand and quickly replenish products before they go out of stock.
JIT won’t work for everyone. However, it can be very beneficial if your business is growing fast. It’s helpful if you’re bootstrapping your crafty business and don’t have a ton of cash flow or time to hold a ton of inventory yet.
The JIT method also works well for product line extensions and calculated product launches.
6. Consistent Auditing
While the word “audit” sounds scary, it’s really not that bad. It simply means to count your inventory to ensure everything lines up. There are two main ways you can do this:
- Physical inventory: This is where you literally count all of your inventory at once. Most businesses do this at the end of the year when they’re also doing year-end accounting and income tax work. It’s true that counting inventory can be tedious, but it’s necessary.
- Spot checking: If you do yearly inventory but you’re still running into issues, you’ll want to consider doing spot checking. This is where you pick a product, count it, and compare the number to what it’s supposed to be. You don’t have to spot check on a regular schedule. It can be done at random in addition to your yearly physical inventory count.
7. Create a Contingency Plan
There are a ton of problems you could run into related to inventory management. For instance:
- You run into a cash flow issue and can’t pay for products you need
- You miscalculate inventory and find out you have less product than you thought
- Your manufacturer or supplier discontinues your product or materials without warning
- Your sales spike out of nowhere and you oversell your stock
- A product just won’t sell and it starts taking up all of your storage space
These types of inventory problems happen to small businesses all the time. It’s not really a matter of if, but when. So, your best bet is to be proactive and create a contingency plan.
If any of the above problems happen…
- How will you react?
- What steps will you need to take to solve them?
- What will the impact be on your business?
You should make sure you know the answer to these questions to prepare for the unexpected.
The most important part of your contingency plan should be to reduce the risks of inventory problems happening in the first place. The best way to do this is by following the inventory management tips above.
Keep in Mind…
Whether you run an Etsy store, own a brick and mortar store, or sell your products at local craft fairs, you’ll want to ensure your inventory is on point.
Remember, inventory is essentially a placeholder for money. You pay cold, hard cash for materials and you only get your money back if you sell that product.
Holding too much inventory can tie up a ton of cash. That’s why effective inventory management is crucial for you as a small business owner, especially if you’re still growing.
Spending a bit of time managing your inventory won’t just make your business more profitable… It will also give you the peace of mind that everything is aligned, so you can get back to focusing on your craft.
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