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How do I manage inventory?

Henry Ong gives 5 simple steps to manage inventory and maximize your cash
By Henry Ong |

Q:  I am a small, start-up business owner—I recently started a neighborhood convenience store, which I plan to expand by the end of the year. I do my own bookkeeping. Can you give me some tips to make this task less of a hassle?

A: One of the first things that you can do is to make sure that you have put in the proper internal controls in the business. Running a convenience store involves a lot of purchasing and inventory decisions. Without policies and procedures, anyone working for you can make a purchase request at random whenever they see the need to reorder an item. You may also find yourself struggling with excess inventory because of overbuying, or having poor quality, and thus slow-moving, items.

This is a common issue faced by many start-up retail companies that have cash flow problems. When there is too much inventory that is hardly moving, a substantial amount of cash for working capital is tied up. As your payables to suppliers become due and without enough cash, you will have no choice but to unload some of your merchandise at huge markdowns to raise the needed cash. If you plan to expand your business this year, start implementing some controls in your purchasing cycle. Effective purchasing is important in sustaining profitable operation of any retail business like yours. For starters, consider these five simple steps:

1. Make an order only on the basis of purchase requisition. The purchase requisition is a formal documented request made by your employee stating that additional merchandise has to be bought based on his sales forecast.

 

2. Locate suitable supplier. When a purchase requisition is received, you can ask for price quotations from several suppliers and select the best one based on your criteria.

3. Issue a purchase order. You issue this after selecting your supplier and when you are ready to make an order. The supplier must sign the purchase order after receiving it, as this will become a binding contract between you and him.

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4. Follow up on purchase order. You need to follow up on your supplier from time to time to ensure that delivery is on schedule. This is necessary especially when the supplier needs to determine if your order is available in their warehouse.

5. Verify receipt of goods. When your supplier delivers the goods you order, someone in your company should take physical custody, inspect the quality of the goods and sign the carrier’s release if everything is in order.

Once your order has arrived, you can update your books to reflect the increase in inventory. Managing inventory is important when you run a convenience store because you need to account the inventory levels of each item and analyze your turnover. When you monitor inventory, you can minimize the amount of inventory investment you need to make as you project your purchase orders ahead. Also, because inventory items are regularly checked, you can also lower the risk of theft in your store and maximize sales by ensuring continuous supply of items in the shelves.

With so many items in the inventory to monitor, how do you actually update it in your books without any error and delay? You can simplify this task by using a Point- Of-Sale (POS) barcode scanner to do the inventory control for you. Bar codes are the printed patterns of lines, spaces and numerals that appear on the product. The bar codes are read by a scanner, which then transmits the data to a computer. Once transmitted, the inventory file is updated and the corresponding sale is also automatically recorded.

When you have this system, you can easily check levels of inventory of any item at any time. For control purposes, it is advisable to conduct a physical count of inventory periodically to ensure the accuracy of the records of the system. Reconcile what is on record and what is actually counted, should there be any discrepancy. Having a POS system will save you a lot of time, given its speed and accuracy.

For bookkeeping purposes, you can simply get the data from the POS system, which has already been processed for you such as total sales, cost of inventory sold and ending inventory to start with.  You can then work on other accounts to complete your financial statements. You can also have accounting software interfaced with your POS system, so that all transactions would be automatically encoded and you would only need to generate the financial statements.

Deciding whether to invest in software to make the accounting process easier and more efficient depends on the returns and benefits that you will get from investment. You may start with simple software and adjust the capacity of your software investment as you grow and expand.  

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