Hi, everybody set David here from the world famous Nerd Enterprises, Inc.
QuickBooks invited me
to be part of this video series designed to help your business grow.
Today we're going to show you
how to use inventory analysis to optimize your business operations.
You may know me from my YouTube channel where I trained small businesses
like yours and things like accounting process and workflow design
to help you run your business and grow it more effectively, more efficiently
and with greater accuracy.
But before we continue, make sure you bang that
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In today's On Demand world,
customers expect their orders to be delivered quickly and correctly.
Effective inventory management
will allow you to be able to keep up without getting overwhelmed.
This means better cash flow or greater profits and less stress.
If you want to read up on inventory analysis, check the article below.
Inventory analysis is the process of determining
the optimal amount that your business should carry when you have a clear
idea of the amount of inventory it takes to keep your company profitable.
You can keep up with customer demand, increase sales
while controlling costs without locking up too much cash in your inventory.
Inventory analysis helps a business understand the right inventory levels
so that we can identify trends and get the right mix of products
based on customer demand.
The benefits of inventory analysis include five key things.
The first one are reduced stock outs and project delays.
Stock outs could result in lost sales and unhappy customers
who will go to your competitor for a similar product.
The second one is improved cash flow.
Inventory analysis can help you determine when your business should stock up versus
when to bleed your inventory down, helping you to avoid cash flow problems.
The third one is Happy Customers.
Inventory analysis enables faster response times
and efficiently filled orders, which in turn earns you loyal customers.
The fourth one is reduced inventory waste.
A proper analysis can dramatically improve inventory control.
This also applies to theft, lost inventory and shrinkage,
which can reduce cost and allow it to introduce cost controls.
The fifth and final one is better pricing from suppliers.
Knowing which items are most profitable helps you confidently negotiate
with suppliers and improve your bottom line.
There are several ways to analyze inventory.
ABC analysis is one of the most popular inventory analysis
methods, and it puts all of your inventory into three buckets.
Inventory is the inventory that has the highest value.
It should be your highest priority and rarely, if ever stock out.
The inventory is inventory that sells regularly but doesn't have
as much value as inventory and costs more to hold than inventory does.
See, inventory is the rest of your inventory,
and it's the least cost effective inventory that you have.
ABC analysis lets you separate your most important inventory from the rest
so that you can give it more focus, boost your profits and control your costs.
It also lets you reduce obsolete inventory, optimize
inventory turnover, increase prices and forecast demand.
The next inventory analysis
method that I want to talk about is called VED analysis.
Standing for vital, essential and desirable vital inventory items
or items that you absolutely must have in stock no matter what.
Essential are items that you should have in stock at a certain minimum
amount and desirable or optional items you'd like to have in stock.
But it's not absolutely critical.
The next method of inventory analysis that I want to talk about is called h m
l analysis high, medium and low cost.
As the name suggests, this method of analysis only considers the unit
cost of an item, and it ignores the sales value of the item,
high cost of the high unit cost items, medium cost of the medium unit cost
items, and low cost of the low unit cost items that are in your inventory.
The next method of inventory analysis that I want to share with you is called SDE.
Inventory stands for scarce, difficult or easy.
And this method refers to the scarcity of the items
or how difficult they are to get in the marketplace.
Scarce are items that are scarce or take a really long time.
For example, they're being imported and they take a while to ship in.
Difficult refers to items that are simply difficult to get
and easy or items that are easily acquired.
There are a few important metrics
you can use to analyze your inventory and increase your bottom line.
The first one is GMROI or grandma ROI.
I mean, gross margin ROI,
GMROI stands for gross margin return on inventory.
It's easy to make the mistake
because we're so used to hearing ROI as a return on investment.
So keep in mind where we're talking about GMROI it stands
for gross margin return on inventory.
This measures the profit a retailer makes for every dollar of inventory purchased
at or available to promise as a metric used to analyze order fulfillment.
You take the quantity on hand minus what's out on sales order,
because that inventory has already been promised to people.
If you like, you can also add in the element of what's out on purchase order,
because this is inventory you expect to arrive in shortly,
which can also be used to cover future orders.
Your ideal ATP will depend on your industry as well as your own
customer's expectations and frankly, your own direct experience.
The next metric I want to talk about is called your inventory turnover rate.
It measures how effectively you're managing your inventory.
And it looks at the number of times inventory is turned
over or sold during a specified period.
You'll find your inventory turnover rate by dividing
cost of goods sold over average inventory for a period.
Ideally, you want this to be as high as possible, which indicates that
you're selling items quickly and not over stocking and wasting capital carrying
costs or the costs incurred by storing and maintaining inventory.
The represented by the varying costs associated with holding inventory.
Speaking of inventory, parts don't spell part backwards. It's a trap.
Average days to sell inventory is used to determine
how long it takes for you to either buy or create the inventory and then sell it.
You can find this metric by dividing inventory by total cost of sales
and then multiplying that by the number of days in the year,
which, by the way, is three hundred and sixty five.
Unless it's a leap year, then it's three hundred and sixty six.
Your stock out rate is the ratio of your total stock
losses to total orders expressed as a percentage.
This is a measure of how effectively your company is managing inventory.
Last but not least, you should look at your customer service level or CSL.
This is the probability of not having a stock out and losing sales.
This should be as close
to 100 percent as possible, especially for your high value inventory.
You can calculate CSL by taking the total number of products
delivered on time, divided by the total number of products sold.
Here are some best practices to keep in mind, No.
One, audit your stock levels before doing an inventory analysis,
you should count your inventory to make sure that it agrees
with what you think you have on hand. It often won't.
And when it doesn't, you'll adjust your numbers accordingly.
Number two, align your inventory analysis with your strategy and business goals.
You can mix and match any of the above methods, but the most important
thing is to get in alignment with your team about your inventory
analysis, strategy and business goals to use your resources more effectively.
Number three, use inventory management.
Software automation and visibility are key when it comes to analyzing inventory
with QuickBooks online.
Plus and advanced, you can manage your inventory in real time.
So you always know what's on hand
and ensure that you're never under overstocking your inventory.
Now get out there and start your inventory analysis today.
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