Proactive Inventory Management

proactive inventory management visual aid

Proactive Inventory Management

What is Proactive Inventory Management:

Inventory management is the process of ensuring that a company always has the products it needs on hand and that it keeps costs as low as possible. As opposed to reactive inventory management, proactive inventory management involves future-proofing your inventory stock by utilizing real-time data and analytics.

Taking a Proactive Approach to Inventory Management:

Inventories are company assets that are intended for use in the production of goods or services made for sale, are currently in the production process, or are finished products held for sale in the ordinary course of business. Inventory also includes goods or services that are on consignment (subject to return by a retailer) or in transit.

Basic inventory management means maintaining effective internal controls over inventory, including safeguarding the inventory from damage or theft, using purchase orders to track inventory movement, maintaining an inventory ledger, and frequently comparing physical inventory counts with recorded amounts.

Common inventory accounting methods include “first in, first out” (FIFO), “last in, first out” (LIFO), and lower of cost or market (LCM). Some industries, such as the retail industry, tailor these methods to fit their specific circumstances. Public companies must disclose their inventory accounting methods in the notes accompanying their financial statements. These common approaches to taking inventory do not take proactive measures.

Proactive inventory management makes its biggest mark on the inventory line item of the balance sheet. That line item doesn’t just reflect the cost of the inventory; it also reflects costs directly or indirectly incurred in readying an item for sale, including not only the purchase price of that item but the freight, receiving, unpacking, inspecting, storage, maintenance, insurance, taxes, and other costs associated with it.

Utilizing a inventory management software solution can drastically optimize inventory stock taking, alleviate any asset management issues, and turn your reactive inventory management system to a proactive one.

Why it Matters:

Proactive inventory management is a key component to cost of goods sold and thus is a key driver of profit, total assets, and tax liability. Many financial ratios, such as inventory turnover, incorporate inventory values to measure certain aspects of the health of a business. For these reasons, and because changes in commodity and other materials prices affect the value of a company’s inventory, inventory management is important.

Proactive inventory management is also vital to managing a company’s supply chain. Buy too much stuff, and a company can end up paying more for warehousing, insurance, shipping, and other services related to obtaining and maintaining inventory. All of these affect the bottom line. Finding the best way to buy, store and move inventory can make the difference between profits and losses for many companies.

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