For most business owners, the thought of doing an inventory count ranks up there with going to the dentist. In the moment it’s not enjoyable. But an annual checkup can keep your business — and your mouth — healthy and strong.
Ongoing inventory counts are important for managing stock and planning orders, and the big one at the end of the year is crucial. First, you need to make sure your in-store inventory matches your records. Discrepancies could indicate some problems inside your business. Your year-end inventory count also helps you avoid overstocks that drain cash flow and stockouts that might frustrate customers. And then there’s the most important reason of all: taxes. Having year-end inventory numbers is necessary to file your return and calculate cost of goods sold.
Whether you do it yourself, enlist your employees, or hire an outside agency, year-end inventory is a task that can provide insights to use in your business going forward. Once you’ve completed your count, here are four ways to use the information you gather for next year’s business plan.
1. Forecast sales
Reviewing your inventory numbers can help you predict future demand of your products based on your sales history. For example, you may have higher sell-through rates on certain categories, which can indicate the types of items in which shoppers are most interested. Or you may find specific product trends due to consumer demand or season.
Knowing what customers purchased over the past year helps you forecast sales and process timely purchase orders, especially if you are experiencing supply chain issues. For example, if you know that customers buy one type of product during a certain time of year, you can anticipate a similar trend and submit an order ahead of time next year to meet the demand. You can also create contingency plans for stock shortages, substituting a similar item.
2. Make better decisions
The goal of smart inventory management is to keep your carrying costs low without missing out on potential sales. Your year-end count can help with planning by giving you information that helps you boost profitability based on the value of inventory rather than SKU velocity. For example, you can identify which SKUs generate profits and which cost you money by taking up warehouse space. Then you can make decisions to liquidate underperforming or obsolete items from your inventory.
You can also set inventory levels that trigger reorders to avoid lost sales on fast-moving items. If you have more than one location, inventory numbers also provide product sales patterns based on store trends, which can be helpful if you want to shift inventory to different locations for faster sales.
3. Assess shrinkage
Year-end numbers will also alert you to loss of inventory. If you have experienced an increase in shrinkage, you may have a problem inside your store that needs to be addressed, such as shoplifting, employee theft, vendor fraud, or administrative errors.
Understanding loss levels can help drive actions to reduce shrinkage next year. For example, you may need to boost security measures, such as installing cameras or adding anti-theft tags on high-dollar items. You may also want to review your recruiting and hiring procedures or increase your use of reference and background checks on new and seasonal employees.
Some shrinkage may be due to mistakes in data entry. Make sure to use inventory management tools such as bar code scanners that can streamline the process and boost accuracy.
4. Set promotional schedules
Year-end inventory can also help you understand past promotions and their impact on sales, which can be helpful when planning future offers. You may find certain SKUs sell well all year long, while others only move when they’re marked down. You may decide to repeat successful promotions, especially during slower periods when you want to generate revenue. And you can plan a promotion to help move stale inventory or use it as a gift with the purchase of another item.
Inventory reports can help you place orders proactively and plan promotions to align with supply chain SKU availability. This helps you keep inventory carry costs low without missing out on potential sales due to a product that’s not available.
Performing your year-end count may not be your favorite part of owning a retail business, but it can provide you with plenty of information to grow your company. Approach it with an attitude of discovering the insights within your inventory report, then use those insights to improve your year-over-year results.