Overstocking products is one of the problems a small business owner may face as they try to build their company. You may encounter lean months where your supply surpasses the demand for them. This ties up your cash and may make it difficult to meet immediate financial obligations.
These are the causes of excess inventory you should identify and address.
Imprecise Demand Forecasting
Some small business owners overstock because of inaccurate forecasting. They overestimated the demand for their products and miscalculated consumer behavior. This ties up cash flow which you could’ve used for investing in company growth, product development, marketing, and addressing immediate needs of operations. If you have excess inventory, identify and implement different ways to move products quickly.
Long Lead Times
Your suppliers are directly involved in your business. If there are delays in their delivery, it can have a negative effect on your inventory. You might have few products left that can’t meet the demand of your customers. It might also affect your forecasts and purchase orders. Long lead times can make you think you should purchase more items. This leads to overstocking on items that may not sell as fast as you want to.
Unsatisfactory Management of Inventory
The team you chose to manage your small business’ inventory may be doing an unsatisfactory job. They might be using the wrong tools or none at all to monitor products. They might also not be communicating and coordinating with your suppliers. All these cause problems in your supply chain which has a negative effect on your inventory.
One of the causes of excess inventory is that you might’ve chosen an unreliable and inconsistent supplier. They deliver inventory late, they don’t coordinate and communicate and they have plenty of back-orders. You end up buying too many items you can’t sell within your sales timeline.
Disadvantages of Overstocking
Overstocking of products is detrimental to your small business. It holds cash which you could’ve used for immediate company needs or for future investments. It also takes up storage space you could use for items you could sell quickly.
If you need assistance with updating your accounting books to enable you to monitor inventory, you can reach out to us through [email protected]. You can also review Robookkeeper’s affordable bookkeeping services.