Tips to help determine how much stock to keep on hand.
If your business carries inventory, you may be facing a dilemma: Too much inventory can tie up valuable cash you could be using for other purposes, plus you risk loss from spoilage, theft and seasonal drops in demand. But pare your inventory too drastically and you may find yourself unable to fulfill orders and losing sales as a result. Here are a few tips to help you determine how much stock to keep on hand:
Par for the Course: Establish a par level for every item you keep in stock. This should represent the amount you are typically able to move between deliveries. If your par is 100 widgets and you sell 90 by the time you reorder, purchase 90 more to bring yourself back to par. Note pars are not fixed: They should vary depending on your anticipated demand.
The Max for the Minimum: In addition to a par, you should have a minimum stock level for each item. When stock reaches minimum, it's time to reorder. This minimum (which is built into the total par) depends on lead time between order and delivery. If, for instance, you sell five widgets a week and it takes two weeks for your supplier to deliver an order, your minimum should be five units--enough to carry you until you replenish your stock.
Chain Chain Chain: You should also consider the stock items needed at specific steps in your manufacturing process. After all, if you have everything you need to build your widget except 2-inch bolts, you'll wind up with a lot of unfinished widgets, spare parts and unproductive employees. Map out your production process, and be sure to have the parts before they're needed.
Maintaining an efficient inventory can mean the difference between a cash crunch and capturing every sales opportunity that arises. With a solid grip on your inventory, you can not only offer a greater variety of products, you can also maintain a healthy cash flow while still providing the quality service your customers expect.To learn more about the effect inventory can have on your cash flow, read "Want to Turn a Profit? How to determine the numbers every business needs to know." from the spring/summer 2013 issue of Insights for Women in Business.
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