2. The health of a business is dependent upon cash
flow. So you need to be conscious of ways of
using funds more efficiently.
3. Owning a business that
carries inventory for resale
presents special challenges.
Inventory items drain your cash, but managing
inventory for resale actually drives cash into
your business.
4. Use financial information regularly
to monitor your inventory levels.
Your optimal amount of inventory
is just enough on hand to meet
customer demand. The secret to
managing this successfully is by measuring inventory
turnover. This is the ratio of your cost for items sold
from inventory to the cost of inventory on hand. Put
another way, divide cost of goods sold by current
inventory: If you sold widgets last month that cost you
$300 and you paid $100 for widgets on hand, your
inventory turnover is three times per month.
5. This measure is only reliable if
your accounting separates the
cost for inventory items from
any other category within cost
of goods sold. Ideally, you want
a breakdown of the cost of goods
sold and the current inventory figures for each
item your business sells. Downward-creeping
inventory turnover is a signal you need fewer
items on hand to meet demand.
6. Of course, occasional physical
inspections are necessary to
ensure that inventory figures
are accurate. Count the
number of units in an
inventory item category and multiply by the cost
per unit. This is tedious work, but you can
always hire a service to do it. A bookkeeping
entry corrects your financial statements to
match the inventory count.
