Poor Inventory Management Is Eating Up Your Profits And Taking Cash Out Of Your Hands
Did you know that poor inventory management can lead to an overall decrease in your profits affecting the amount of cash you have on hand? Well, if you’re like Peter*, you might have had to learn that the hard way.
Peter and I met earlier this year after one of my clients referred him to me in hopes that I could detect what was causing his profits to decrease. After doing a thorough review and analysis of Peter’s business it was clear that the most significant issues contributing to the problem had to do with inventory management control. These issues were the following:
- Inventory volumes were not being properly tracked and by consequence were spread across different areas of the production space.
- At the time of the review there were no inventory count records available, which led to inventory being accumulated over the years and making it difficult to tell which items were actually available.
- Inventory orders were often made at the last minute, resulting in paying higher prices for rushed orders.
- Lastly, due to the lack of proper inventory tracking, orders would be placed despite the items already being in stock, leading to unnecessary duplicates and an excess of inventory on hand.
Poor inventory management was clearly playing a significant role in lowering the gross profits of Peter’s business and as a result was also depleting the cash he was collecting from the sales he was making. Why? Because his cash was constantly being tied up in inventory! Additionally, not properly counting inventory or adjusting the balance on hand was leading to all the inventory purchased throughout the year, whether it was used in production or not, to be expensed. This skewed the cost of goods sold over time and by consequence led to gross profit goals not being realistic or achievable.
How Did I Help?
With the help of Peter, I restructured his operations and started to control and track his inventory, producing the following results:
- Cash flow increased to a positive level due to the inventory now being controlled and maintained through the appropriate systems, leading to a preservation of cash that wasn’t being wasted on unnecessary purchases.
- His gross profits increased by 15% contributing to a total increase in profitability as a result from both controlling inventory and better allocating the inventory costs to the cost of goods sold.
If you’re interested in improving the profitability of your business, connect with me on LinkedIn https://www.linkedin.com/in/fsilveiracpa or email me at firstname.lastname@example.org or call at (905) 361-8698.
*Disclaimer: The content of this blog does not reflect any client specifics but is a story based on a compilation of various client experiences.
CPA, CGA, LPA
Partner, Assurance Services
Filomena is an Assurance & Advisory Partner at BGD. She is a Chartered Professional Accountant with over 20 years’ experience, servicing clients across a range of industries, such as consumer packaged foods, construction & real estate, manufacturing, mining, retail and professionals. Her diversified and extensive experience includes leading projects at a national Canadian grocery and […]
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