There is no definite answer to the question of “How much inventory should I start with?”. However, some practices and formulas can help you develop a practical and efficient inventory strategy.
It is crucial to understand that the inventory cost includes more than just the price per unit. It also encompasses the variable expenses of purchasing, shipping, maintaining stocks, and more.
So, to make sure that you have maximum control over your expenses from the very start of your journey, it is essential to have a precise management system in place. Otherwise, you may run into issues like overstocking, understocking, shipping delays, damaged products, to name a few.
When deciding on the quantity of your stock, consider the following factors.
Inventory Costs and potential risks
The cost of the things you sell will be the most critical element in deciding how much inventory you can buy at once.
However, when evaluating the potential benefits from your inventory, you will need to compare it with the amount of risk.
To make more informed and strategic decisions, it is essential to decide your business’s priorities and objectives. For instance, you need to define whether you want to reduce your stock investment risk or maximize the potential advantages of buying shares in more significant quantities.
You will also need to determine whether it is more vital for your business to have safe, lower-cost stock, or it is more important to minimize the investment and maximize your versatility to meet the changing demands.
Keep in mind that meanwhile investing in additional inventory may result in higher profitability; it will only happen if the products are sold. It’s critical to assess how much you can afford to spend before deciding on increased quantities or new items.
Seasonality
When deciding on the quantity of your inventory, it is essential to stay up to date and know which products sell or have the potential to sell better than the others. Keep in mind that those trends will change season after season. So, you need to be aware of how quickly particular items in your stock are selling.
It will help you plan markdowns to guarantee healthy margins and figure out what extra inventory you have. With modern inventory management systems like eSwap, you will be able to separate archives for seasonal items to help you manage your inventory.
Storage Space
Another major factor before deciding on the amount of inventory is your storage capacity. Many businesses consider inventory storage to be a significant investment. For instance, many products require climate control or particular unique storage requirements.
Depending on your storage space, you will need to decide how many goods you can transport.
When purchasing new products, you should ensure items’ shelf life. It largely depends on the availability and price of space in your storage. For instance, the turnover rate for farmer’s markets is different from that of device stores. Being fully aware of your storage space expenses will allow you to make more informed decisions. This means you will know how long your items may be stored.
In this regard, inventory management software can help you to have complete control over all inventory movements in your supply chain and warehouses, such as picking, packing, shipping, and receiving new inventory, among others. The software will allow you to import and export information about your products and valuable data on products out of stock or low stock.
Average days to sell inventory formula
Days sales in inventory (DSI), which is often referred to as days inventory outstanding, is a calculation that determines how long it will take a business to sell all of its stock.
Besides indicating how long a company’s inventory will endure, the days’ sales in inventory ratio also calculate the value, market liquidity, and cash flows of a company.
A lower DSI is generally more preferable as it indicates that a shorter time is required to sell inventory.
It also suggests that a firm is selling its goods more effectively and often, which implies faster turnover and the possibility for a higher profit.
Lower DSI is also a good indicator for determining the freshness of the merchandise.
On the other hand, a high DSI rating suggests that the corporation is dealing with old, high-volume inventory. Nevertheless, it can also indicate that the corporation holds large amounts of stock to attain high order fulfillment rates.
How to calculate DSI?
To calculate the days’ sales inventory, you will need to divide the ending stock by the cost of products sold for the period and multiply it by 365. Keep in mind that you can compute days in inventory for any time by just changing the multiplier.
For instance, Ashton’s souvenir company has financial accounts that indicate that the ending inventory is $75,000 and the cost of items sold is $175,000 at the end of the year.
To compute the DSI for Ashton’s firm, divide $75,000 by $175,000 and multiply it by 365. Ashton’s ratio will be 156 days, which indicates that he has enough inventory to supply for the next 156 days.
It also means that Ashton will convert his stock to cash during the next 156 days. Keep in mind that while for some inventories and industries, this might be a specific period for clearing the stock, for others, it may be too long.
The number of days sold in inventory is a crucial factor in inventory management.
As already mentioned, maintaining and storing inventory requires financial investments. Therefore, to avoid obsolescence, it is essential to boost cash flow and ensure that stock moves as quickly as possible. Remember that the longer a product remains on the shelves, the less cash the firm has available for other purposes.
