Having too much or not enough stock can be bad for business. You need enough stock to meet customer demand, but not too much that it costs you more than you need to be spending on things like:
- keeping accurate tracking records
- controlling stock to avoid theft
The estimated cost of holding stock is 10% to 30% of its value.
Review current stock levels
To review stock levels and stock sales volume:
- Work out your current stock levels and its value You can use accounting or stock control software to track individual stock items.
- Look at sales records to find out which items are good sellers and which are slow moving – remember to look at seasonal trends.
- Work out which items of stock sold make the most gross margin — the percentage of total sales revenue you make after taking away the direct costs of producing your goods. Focus more energy on these sales for improved profit.
- Make a list of slow moving, old and excess stock items and develop an action plan to move this stock immediately. Even if it's discounted below the cost of the item, you can use the money made to buy new stock that sells.
- If you donate slow-moving stock to a charity, let your customers know.
- Update your stock records and ensure your financial policies and procedures manual includes a policy to track all movement of stock. This will help with reordering stock only when you need to, and highlight any theft or fraud that may occur.
Calculate your stock turn rate
The 'stock turn rate' is a calculation you can use to check if your stock planning is effective. A low stock turn rate means you're moving stock too slowly. This creates excess or 'aged' (old) stock, as well as higher holding costs. A high stock turn rate could mean you don't have enough stock on hand to supply customer needs.
To calculate the stock turn rate divide cost of goods sold by cost of stock on hand (cost of goods sold ÷ cost of stock on hand).
Set up a stock control policy
When putting a stock control policy in place:
- Identify stock you always need and make sure you have sufficient supply.
- Tighten the process of buying stock – knowing the volume sales per stock item will help you buy the right amount.
- Keep accurate stock records and match them to a regular physical count, at least once a year. If there's a big difference between the records and physical count, do the count more often until you've worked out what's causing the difference
- Negotiate deals with suppliers — avoid volume discounts unless you're selling large volumes of the item. You can also try to negotiate discounts for quick settlement if you can afford to, or negotiate for smaller and more frequent deliveries from your suppliers to smooth out your cash flow.
- Don't let discount prices drive your stock-buying decisions – buy stock you can sell at a profit in a reasonable time frame.
Other influences on stock management
You might be able to improve stock management by reviewing your policies and business practices.
Order less stock more frequently and arrange better delivery schedules. This won't affect your sales but can:
- reduce stock quantities
- save money
- improve liquidity
Marketing and selling stock
Review how you might be able to change your sales policies to manage stock better. Your policies could allow for a higher turnover of goods by:
- selling goods bought at bargain prices faster
- clearing slow-moving items
Also consider your marketing and promotion strategies. Make sure you have enough stock on hand before you launch a promotion. If you've taken on more stock than usual, you need to have a back-up plan in case it doesn't sell.
Look at ways you might be able to improve customer delivery. Not only will this help move your stock quickly but it can also mean you receive cash for the sale faster too.