You’ve developed an understanding of what it takes to run a small business through the events and lessons you have experienced. You know how to develop and sell your products to your customer base and you have a sense for what it is they want. While this makes for a good foundation, a small business can only expand so much without having some metrics in place to monitor and track performance. Mastering inventory management metrics is necessary to propel your business forward.
Inventory management is an aspect that is often overlooked. Establishing your key inventory management metrics and actively monitoring these is a step towards seeing your business expand. When you’re tracking the right inventory metrics, you’re able to better control costs and your inventory levels will best represent what you are selling and shipping, reducing the time and space required to operate.
There are several key metrics that an owner must be tracking in order to remain competitive. Metrics such as inventory turnover, inventory-to-sales ratios, and gross margins all work towards giving you the ability to judge how efficiently your business is operating. You should set up tracking for whichever metrics most closely align with your overall business goals. This way, you’re setting your business up for increased profitability and growth.
Using Metrics to Increase Profit Gains Through Inventory Management
It’s rare to find a business that doesn’t want to increase profitability, but it is also uncommon to find a small business owner using the correct metrics to measure inventory performance. The metrics you set around increasing profit margins are the most critical to your long-term success and put to good use all of the data you have been collecting. These metrics can be used to determine cash flow, product profitability, and track dynamic values such as supply and demand analysis and inventory turnaround ratios.
It’s useful to break down inventory management metrics for maximum profitability into a number of smaller categories. These all give you a deeper look inside of your business data.
- Gross Margin. Essentially, gross margin is your business’s total sales revenue minus the cost of the goods you’re selling. Many times, business owners miss or ignore this very important point. Tracking this metric is critical if you want to know exactly where you stand financially. Speaking strictly in inventory management terms, this metric is crucial for growing your business as it tells you if your increased volumes are lowering the overall costs of your products, thus increasing your gross margin. This metric will serve to pinpoint where further innovative ideas around your processes may be found. Plus, as your sales volume increases, you may be able to negotiate better pricing from your suppliers which improves your gross margin.
- Sales Revenue. Sales revenue is the net of the income you receive from your goods and services minus the costs of returns or undeliverable products. It also includes revenue minus discounts and refunds, all of which is pre-tax. Tracking your sales revenue may seem redundant when you are already using metrics for gross margin. This is not the case, though, as this set of metrics presents your business with an opportunity to get a detailed view of where your various revenue streams are originating. Here you also gain perspective into what the cost of doing business is with your different customers, including valuable insights such as who is returning your products the most or even who seems to have the most delivery issues.
- Inventory Accuracy. Is there a discrepancy between your inventory records and the actual amount of physical inventory you have on hand? Are your SKUs for different items ringing up properly? Small businesses have a smaller margin of error when it comes to inventory than their larger counterparts. Being a small business owner, you cannot afford to have money tied up in inventory that is not moving. However, you also must ensure that you have your most popular items in stock at the time they are needed. This prevents delayed or canceled orders, as well as wasted space and time both in the storage of and maneuvering around stock in your storeroom. With the appropriate metrics in place, you will know exactly what your inventory turnaround rate is, keeping your stock under control even under the pressure of working with seasonal items.
This short, yet valuable, list of profitability metrics is a great step towards getting a handle on where your revenue streams are coming from and where you are spending the most money. The detailed reports of these figures give you the advantage of seeing precisely where to target your innovative ideas and research. With this info in hand, you can start to boost your business to higher levels of profitability. You will also be able to delve into deeper business metrics like burndown tracking of your employees’ production.
Tracking Markups, Markdowns, and Turnover
Inventory management comes with many sub-genres for tracking and reporting that step beyond looking at your physical products and revenue stream. One is reporting which represents the state of your markups and markdowns. The simplicity of these reports makes it all the easier to get a snapshot of how well you’re costing your inventory.
This is very useful when combined with inventory management metrics such as inventory turnaround and inventory accuracy, as this establishes an avenue for merging your key channels into one easy-to-read report. You will find that this is vital as it shows you where you’re pricing correctly, where adjustments need to be made, and where turnover is suffering. It also helps to inform future inventory decisions.
These metrics can better illustrate inventory levels when you introduce, or better utilize, modern inventory tools such as multi-purpose smart devices. Such devices can be used in a myriad of ways; as bar code readers, payment hardware, time tracking, and querying inventory for specific items. This is but an example of a low cost and high reward gain made possible by using metrics in a highly effective way.
Inventory Management Metrics to Level Up Your Business
Goal setting is a key task for any business owner—but so is being able to show that you are meeting these goals. In order to obtain the data needed to create and report on these metrics, you will need to select a system that is both easy to use and has the flexibility to grow with your business. The right system simplifies the process of tracking inventory metrics so you’re able to gain actionable insights from all of your data. So what qualifies as the right system?
We understand that you are busy and the reality is that it’s difficult to devote the time to sit down and figure out your inventory management metrics without help. This is where talech can help. We understand the challenges that come with inventory management for small businesses, and that your key inventory metrics must remain unique to your business, so we work with you to understand your business goals. Reach out today and sign up for a free demo to learn more about how talech can be your valued partner in developing and understanding your inventory management metrics.