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For many small businesses (especially retailers), inventory is a large portion of working capital investment and the company's equity. Inventory losses (even minor ones) can have a great impact on both the value of the company and its profitability. It is important for small business owners to recognize what risks their inventory faces and develop ways to minimize losses.
Let’s look at four risks to small business inventory and what might be done to manage them.
Inventory Shrinkage
Inventory shrinkage occurs when the product amounts on hand don’t measure up to the amount that an inventory sheet says should be there. This can occur from poor record keeping, inaccurate physical counts, or theft.
Here are tactics small businesses use to reduce shrinkage:
Loss of Perishables
If you have a business that offers food service (such as a restaurant, market, hotel/motel, senior living facility, or even a golf course with a snack bar), spoilage can lead to big losses in a short time. Improper inventory management and handling of stock are the chief causes of these losses.
Here are tactics to reduce spoilage losses:
Too Much Inventory
It may sound odd that having too much inventory is a bad problem, but excess inventory ties up working capital, creates clutter, and complicates the process of checking inventory levels. Too much inventory is usually a sign of poor recordkeeping and inattention to details.
Here are tactics to reduce excess inventory:
Not Controlling Inventory
Many small business owners allow vendors to take care of stocking their products in their retail or wholesale locations. While seemingly more convenient, this can create more inventory problems. It can lead to all three of the risks that we have discussed so far (inventory shrinkage, loss of perishables and excess inventory). To mitigate this risk, consider verifying a vendor’s work or having your own workers take on this essential task.
Taking a fresh look at how your business manages inventory ‒ at many points along the chain from ordering to receiving to stocking to sale ‒ can reduce all of the above risks. When your business develops an updated comprehensive inventory control plan, you can make a material impact on the bottom line.
At Selective, we #thinkBIG about small business. Not only do we want to help you grow your business, but our Business Insurance Coverages can help protect you and your business. Ask your Selective agent for more information. Don't have an agent? Find a local agent now.
Let’s look at four risks to small business inventory and what might be done to manage them.
Inventory Shrinkage
Inventory shrinkage occurs when the product amounts on hand don’t measure up to the amount that an inventory sheet says should be there. This can occur from poor record keeping, inaccurate physical counts, or theft.
Here are tactics small businesses use to reduce shrinkage:
- Limit access to areas where inventory is stored.
- Install security cameras in warehouses or storage areas.
- Designate specific employees to receive all incoming inventory. Develop a system for receiving that requires two more people to verify goods received.
- Recheck purchase orders, invoices, shipping receipts and signed packing lists before they are filed.
- Install a point-of-sale system to track outgoing inventory.
- Have all invoices verified twice against order sheets. Choose appropriate shelving that will allow easy access for stocking, counting, rotating stock and cleaning. Organize the stock area to allow for clear observation and easy movement.
- Run a full inventory on a yearly basis, at a minimum. Account for discrepancies that are discovered.
Loss of Perishables
If you have a business that offers food service (such as a restaurant, market, hotel/motel, senior living facility, or even a golf course with a snack bar), spoilage can lead to big losses in a short time. Improper inventory management and handling of stock are the chief causes of these losses.
Here are tactics to reduce spoilage losses:
- Keep detailed records of use and only maintain a minimum inventory.
- Practice the FIFO (first in, first out) method.
- Use easy-to-read labels detailing when a product arrived and its expected shelf life.
- Have regular maintenance checks performed on all cold storage units.
Too Much Inventory
It may sound odd that having too much inventory is a bad problem, but excess inventory ties up working capital, creates clutter, and complicates the process of checking inventory levels. Too much inventory is usually a sign of poor recordkeeping and inattention to details.
Here are tactics to reduce excess inventory:
- Reduce or eliminate ordering items until sales catch up with stock.
- Eliminate slow-moving items from your offerings.
- Sell surplus stock at cost or below to free up working capital.
- Identify sales levels and stock accordingly.
Not Controlling Inventory
Many small business owners allow vendors to take care of stocking their products in their retail or wholesale locations. While seemingly more convenient, this can create more inventory problems. It can lead to all three of the risks that we have discussed so far (inventory shrinkage, loss of perishables and excess inventory). To mitigate this risk, consider verifying a vendor’s work or having your own workers take on this essential task.
Taking a fresh look at how your business manages inventory ‒ at many points along the chain from ordering to receiving to stocking to sale ‒ can reduce all of the above risks. When your business develops an updated comprehensive inventory control plan, you can make a material impact on the bottom line.
At Selective, we #thinkBIG about small business. Not only do we want to help you grow your business, but our Business Insurance Coverages can help protect you and your business. Ask your Selective agent for more information. Don't have an agent? Find a local agent now.
