Inventory analysis is an evaluation of inventory performance to determine the right amount to maintain profitability. By analyzing data, a business can assess where improvements can be made in production and/or stock levels to meet demand while minimizing cash tied up in inventory.
Each business must compare product performance to its sales goals to determine whether stock levels are delivering optimal performance. Some common performance indicators include turnover, write-offs, average inventory, and number of days to sell. Different categories of products may perform differently depending on seasonal variations or popularity. Having access to timely and accurate data showing costs, sales, and profits will help management in setting optimal stock levels. Products may be allocated to certain categories and evaluated based on the performance of those categories, i.e. top sellers will have a different set of criteria than products that slower moving items. The goal is to satisfy demand while minimizing dead stock or spoilage while minimizing the cash invested. There are many inventory analysis methods; the ones you use may depend on your industry.
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The basic principal of inventory analysis involves examining past performance to predict future trends. Based on those observations, a company can determine if it will need more or less of a product to meet future demand. Part of that picture is painted by the inventory turnover, a percentage that indicates how often inventory has been sold and replaced. Usually, this will be reviewed over a long time period to balance periods of high and low fluctuation. Analysis tends to reveal best sellers and under performers and allows the business owner to plan and act accordingly. If a product does not perform well, that product’s production may be scaled back to allow greater focus on the money makers.
Sometimes finished goods don’t sell. Sometimes products break or spoil. Depending on the industry, these losses may be handled in different ways. Food products, chemicals and medications may be discarded post-expiration or spoilage. Other types of products may sit on the shelves collecting dust because they went out of style or demand has decreased. A discount may be necessary to move them. In either case, the business may have to write off the loss and modify inventory counts. If your balance sheet is showing these products as having their full value, your numbers will be incorrect, overstating profits and potentially impacting tax paid.
The cost of production from start to finish includes labor, materials, and storage. The longer a product sits on a shelf, the higher its storage cost. Looking at this cumulative cost over time indicates which products are most profitable and which are not selling well.
When inventory over a period of time is totaled and divided by the number of periods evaluated, the result is an average amount of inventory, that being the median between the high and lows throughout that same period.
Luckily, the inventory analysis process doesn’t have to be as tedious as it sounds. Without inventory software, it can be difficult to decipher reality from volumes of data produced by different departments. No matter which indicators are most important to your business, SOS Inventory can provide clear, concise feedback of performance for easy evaluation. SOS provides analysis of data in a timely and easy-to-use manner. Because everyone works from the same integrated set of data, inventory counts, costs and sales figures are the same across all the departments. There is just one version of the truth.
Arm yourself with a powerful tool to make all inventory analysis easy, quick, and productive for your entire team.