I can hear you now, "My business is small and I do custom orders only." Well, please consider the following reasons to begin a finished goods inventory system:
- Craft shows - It can be difficult to track every item sold if you get busy. Knowing your beginning and ending inventory can help you reconcile your sales at the end of the event.
- Planning for your heavy sales season - Do you prepare a larger amount of product prior to the holiday shopping season? Enough said.
- Consignment sales - Some consignment stores have formal contracts for items you have delivered, others are extremely informal. You need to be able to identify the amount of product you have placed in a store to be able to reconcile your sales at the end of your month or other time period, as well as an understanding of your cash outlay in product.
- Wholesale sales - As your business grows and you get additional wholesale orders, you will need a method to track on an ongoing basis how much product to make in consideration of how much finished product you have on hand. You may also need to produce additional items to prepare for imperfect or damaged goods.
- Costs of goods sold - Dig out your accounting books! If you remember the difference between FIFO and LIFO inventory accounting, you know the costs of goods can vary over time.
- Cash flow - Your inventory represents liquid assets - an item to be converted to cash. Granted, this conversion doesn't take place until the product is sold. Conversely, your supply inventory is a sunk cost you cannot do anything with until you make a product (unless you sell supplies, which is a bit different discussion).
- Taxes - As mentioned, your finished goods represent liquid assets for end of year accounting purposes. Which is why a good accountant will tell you not to replenish your inventory at your fiscal year end if you can help it.
These are just a few practical applications of inventory management. Our next few weeks will involve a discussion on this topic, specific to your finished goods. While I use Stitchlabs online system to manage my inventory, the principles we discuss will be useful for all systems, even a simple Excel file if necessary.
So please let me know your questions, thoughts and concerns, as well as your experiences and challenges with managing your inventory!
Until then, happy sales!