You’ve built a thriving business that’s making a real difference in your customers’ lives. Your drive, passion, and innovative spirit shine through in all you do. But even the most successful entrepreneurs can stumble when it comes to inventory management. Figuring out how much to buy can be a real head-scratcher, especially if you’re not a numbers person or just don’t have the time to crunch them.
That’s where I come in. As a fractional CFO, I partner with powerhouse women like you. You’re high achievers who might feel a bit shaky when it comes to the nitty-gritty of inventory management. My mission? To help you make savvy decisions that fuel your business’s growth and keep your cash flow in the green. So, let’s break down how to nail down the right amount of inventory for your business.
1. Get to Know Your Sales Patterns
The first step to figuring out how much inventory to buy is understanding your sales patterns. This means diving into your past sales data to spot trends and seasonal shifts in your business. Do your sales skyrocket during certain months or holidays? Are there times when things slow down a bit?
Recognizing these patterns lets you predict future demand and sidestep the pitfalls of overstocking or understocking. Tools like sales reports, POS systems, and inventory management software can give you a clear view of your sales history.
2. Work Out Your Inventory Turnover Ratio
Your inventory turnover ratio is a key number that shows how quickly you’re selling and replacing your inventory over a certain period. You calculate it by dividing the cost of goods sold (COGS) by the average inventory value.
Inventory Turnover Ratio = COGS / Average Inventory
A high turnover ratio means you’re selling inventory fast, which is generally a good thing. But if your turnover is too high, you might not be stocking enough inventory to meet demand. On the flip side, a low turnover ratio could mean you’re hanging onto inventory too long, which can tie up your cash flow and lead to overstock.
Keeping an eye on this ratio can help you make smarter decisions about how much inventory to buy and when to reorder.
3. Try the Economic Order Quantity (EOQ) Formula
The Economic Order Quantity (EOQ) formula is a handy tool that helps you figure out the best order quantity to minimize total inventory costs, including ordering and holding costs. Here’s the EOQ formula:
EOQ = √[(2DS) / H]
Where:
– D is the annual demand for your product.
– S is the cost per order.
– H is the holding cost per unit per year.
The EOQ formula lets you calculate the most cost-effective quantity to order, helping you avoid overordering and cut down on carrying costs. This is especially useful if you’re juggling multiple products and want to make sure you’re not sinking too much capital into inventory.
4. Keep an Eye on Lead Times and Supplier Reliability
One key factor to keep in mind is lead time—the time it takes for your suppliers to deliver inventory after you place an order. If your lead times are lengthy or your suppliers aren’t consistent with their delivery schedules, you might need to order more inventory to avoid running out.
But if your suppliers are dependable and deliver quickly, you might be able to keep less inventory on hand, freeing up cash flow for other parts of your business. Building solid relationships with your suppliers can also give you more wiggle room in managing your inventory levels.
5. Don’t Forget About Safety Stock
Safety stock is the extra inventory you keep on hand to guard against unexpected changes in demand or supply chain hiccups. While you don’t want to overstock, having a safety stock buffer can prevent running out of stock and losing sales.
To figure out safety stock, consider the variability in your lead time and demand. A simple formula to calculate safety stock is:
Safety Stock = (Maximum Daily Usage * Maximum Lead Time) – (Average Daily Usage * Average Lead Time)
This ensures you have enough inventory to cover any unexpected spikes in demand or delivery delays without tying up too much capital in excess stock.
6. Stay on Top of Things and Adjust as Needed
Inventory management isn’t a one-and-done task—it needs regular monitoring and tweaking. As your business grows and changes, your inventory needs will shift too. Regularly review your sales data, inventory turnover ratio, and other key metrics to make sure your inventory levels are in line with your business goals.
If you notice that certain products are consistently overstocked or understocked, tweak your ordering practices accordingly. Being proactive in managing your inventory can help you maintain optimal levels, cut down on waste, and keep your cash flow in the green.
Wrap Up
Figuring out how much inventory to buy for your small business is a balancing act that requires a deep understanding of your sales patterns, financial metrics, and supply chain dynamics. By using tools like the inventory turnover ratio, EOQ formula, and safety stock calculations, you can make informed decisions that support your business’s growth and ensure you’re not tying up valuable resources in excess inventory.
