How to get inventory under control

Inflation, fluctuating demand, and foreign tariffs have created a perfect storm for business owners recently. If it feels like managing your inventory has become significantly harder than it was a few years ago, you aren't imagining things. The rules of the game have changed, and the strategies that worked five years ago might be actively hurting your bottom line today.

For a while, the safe bet was to stock up. Businesses built "strategic stockpiles" to combat marketplace uncertainty and supply chain snarls. But as the dust settles, many companies are finding themselves in a precarious position: sitting on mountains of goods that aren't moving fast enough. While there are plenty of unknowns in the current economy, one fact remains absolute: carrying excess inventory is expensive.

It ties up your cash flow, eats up warehouse space, and increases your risk of loss. If you are looking to trim your buffer stock and maximize profitability without sacrificing the quality of service your customers expect, you need a plan. It’s not just about cutting back blindly; it’s about optimizing. Let’s look at how you can get your inventory under control and get your capital working for you again.

The Reality Check: Are You Hoarding or Managing?

Before we dive into the math, we need to address the mindset. Right now, many businesses are holding onto inventory they purchased during periods of high anxiety regarding supply chains. If this sounds like your current situation, and those goods aren't flying off the shelves, it is time for a strategic pivot.

Holding onto inventory "just in case" is a strategy that costs money every single day. We can advise you on challenges such as using software to accurately forecast inventory needs rather than guessing. We also help clients model the cost impacts of tariffs and other economic variables so you aren't caught off guard.

The goal isn't to have zero inventory—that leads to lost sales. The goal is to have the right inventory.

Start With the Basics: Count and Compare

You can't manage what you don't measure. Effective inventory management always starts with a rigorous physical inventory count. This might seem basic, but accuracy here is the foundation for everything else.

Precise counting is essential for knowing your true Cost of Goods Sold (COGS). It is also the only way to identify discrepancies between what is sitting on your warehouse floor and what your perpetual inventory records say is there. If those numbers don't match, you have a problem that needs solving before you can optimize anything.

Bringing in an Objective Eye

Sometimes, it pays to have an outsider look at the numbers. An external accountant—like the team here at SD Mayer—can bring objectivity to the counting process. We help minimize errors and ensure that the data you are basing your decisions on is rock solid.

Benchmarking Against Your Peers

Once you have accurate numbers, the next step is comparison. How does your inventory performance stack up against others in your industry? Trade associations often publish benchmarks that can serve as a vital reality check. You should be looking at three specific metrics:

1. Gross Margin: This is calculated as (Revenue - Cost of Sales) / Revenue. This tells you how much you are actually making on each item sold.
2. Net Profit Margin: Calculated as Net Income / Revenue. This shows your bottom-line profitability.
3. Days in Inventory: This is a critical efficiency metric. It is calculated as (Average Inventory / Annual Cost of Goods Sold) × 365 days.

Your company should strive to meet—or ideally beat—these industry standards. If your "Days in Inventory" is significantly higher than your peers, it means you are holding cash in the form of product for too long.

Note for our manufacturing and construction clients: While retailers and wholesalers have a straightforward inventory account (goods purchased from a manufacturer), your inventory is more complex. It is a function of raw materials, labor, and overhead costs. We can help you break this down to see where the inefficiencies lie.

A Guide to Cutting Costs

Once you understand the composition of your company’s cost of goods, you have a roadmap for where to cut. There are several levers you can pull to reduce inventory expenses without compromising your product quality.

Renegotiate and Diversify

Look at your suppliers. Can you reduce inventory expenses by renegotiating prices with your current vendors? If they aren't willing to budge, it might be time to seek new vendors who are hungry for your business.

Before you cut back on the volume of inventory you hold, try to negotiate speedier delivery from suppliers. If you can get goods faster, you don't need to hold as much "safety stock." You might even consider giving key suppliers access to your perpetual inventory system so they can see your needs in real-time, allowing for a more just-in-time approach.

The Hidden Costs of Carrying Inventory

When you look at a box on a shelf, don't just see the purchase price. You need to consider the "carrying costs." These include:

• Storage fees (rent, utilities)
• Insurance premiums
• Obsolescence (goods going out of style or expiring)
• Pilferage (theft)

Brainstorm ways to mitigate these specific threats to improve your margins. For example, could you negotiate a net lease for your warehouse? Could you install better anti-theft devices to reduce shrinkage? Could you opt for a different tier of insurance coverage? Every dollar saved here goes straight to your bottom line.

Optimizing Your Product Mix

One of the most effective ways to lower your days-in-inventory ratio is to analyze product-by-product margins.

The strategy is simple but requires discipline: Stock more of the products that have high margins and high demand. Stock less of everything else.

If you have excess supplies of slow-moving materials or products, don't just let them gather dust. Whenever possible, return them to your suppliers. Even if you have to pay a restocking fee, it might be cheaper than the long-term carrying costs of holding dead stock.

Avoiding the "Out of Stock" Trap

There is a danger in cutting too deep. To help prevent lost sales due to lean inventory, ensure your product mix remains sufficiently broad and in tune with consumer needs. This is where the art meets the science. You need enough variety to keep customers happy, but not so much that you are drowning in slow-moving SKUs (Stock Keeping Units).

Frequently Asked Questions About Inventory Management

Why is "Days in Inventory" such an important metric?

"Days in inventory" essentially tells you how liquid your assets are. If your days in inventory number is high, it means your cash is tied up in stock for a long time before it converts back to cash. A lower number generally indicates better efficiency and cash flow, allowing you to reinvest that money back into the business faster.

How can I forecast inventory needs more accurately?

Forecasting is tough, but you don't have to use a crystal ball. Modern inventory management software analyzes historical sales data, seasonal trends, and current lead times to predict what you'll need. At SD Mayer, we help clients implement these tools to move away from gut-feeling ordering to data-driven purchasing.

Is it ever a good idea to hold excess inventory?

Yes, but it should be a calculated decision, not an accident. You might buy in bulk to lock in a low price before a known vendor price hike, or stock up if you anticipate a specific supply chain disruption. The key is to model the cost impacts first to ensure the savings outweigh the carrying costs.

Partnering for Profitability

Getting your inventory under control is about more than just organizing a warehouse; it's about financial strategy. It requires looking at your business holistically—from supplier contracts to insurance policies to sales data.

We know that accounting and inventory management can seem complex, but that doesn’t mean they have to be complicated. At SD Mayer & Associates, we believe that when you understand your finances, you’re empowered to make better decisions. We aren't here to just file your taxes; we are here to be your sounding board and your partner in success.

If you are ready to stop letting excess stock eat your profits, let's talk. We can help you crunch the numbers, benchmark your performance, and develop a customized strategy to streamline your operations.