As a business owner, you have a certain amount of inventory you rely on for sales. Any potential inaccuracies can significantly affect your supply chain. Clients will not be satisfied with their orders, and you will experience losses you never even imagined.
For your business to be successful, your stock levels must be as accurate as possible. Read our article to discover why inaccuracies can happen, how they affect your business, and how much they cost you.
Why Stock Levels Can Be Inaccurate
Inaccurate stock levels can happen in any industry. That being said, retailers must aim for as low a percentage as possible. To do that, you need to determine the exact cause for your low accuracy levels.
The most common are:
- Lack of automation
- Missed stock-taking days
- Inadequate forecasting
- Incorrect placement of items
To increase accuracy, you should improve the layout of your warehouses and instruct your employees to respect the stock counting days. To make things easier for them and save time, you may want to employ the use of inventory management apps. This will improve your efficiency by more than half.
How It Can Affect Your Business
Inaccurate inventory can lead to various problems. Depending on the severity of the inaccuracy, it will put your cash flow in danger and your business.
It Leads to Dissatisfied Customers
Consider this scenario: based on your inventory data, you believe there are enough products in stock to deliver to your customers. When your client makes the order, you go into your warehouse only to find out there aren’t. This leads to a very awkward phone call where you tell your customer the order cannot be completed.
This was an honest mistake, but clients will likely not be happy about it. After such a negative experience, most will even decide to switch businesses. Moreover, one unhappy customer will reach more ears than a happy one. This can lead to losing clients, putting your business in danger.
It Wastes Man Hours
Inaccurate inventories will affect not only your clients but also your business. By this, we mainly refer to the time management of your employees.
As you probably already know, time is money for every business. Before discovering there is an inaccuracy in the inventory, one will spend time searching for the missing goods. Once they realize they are away, they will have to spend extra time picking, packing, and delivering another product.
Moreover, think about the time you or your employee will have to spend talking with your clients. They will be forced to validate their mistakes and find the best course of action to fix them. Very often, finding a solution will be challenging and require time. You will likely need to issue another order, which will bring you back to square one.
Unreliable and Inaccurate Forecasts
A planner can make a reliable forecast if the inventory has been done correctly. If the accuracy level is low, planners have nothing else to use than their instinct. This might prevent them from making an accurate plan for the future.
When a forecast is incorrect, you may not be able to recognize a trend when it pops up. Demand peaks go unnoticed as well, which can lead to a shortage. Regularly doing inventory will keep your stock levels accurate, and you can replenish them when necessary.
Incorrect Inventory Write-Offs
You are entitled to a fair number of deductions as a business owner. This includes deductions from items that you hold in your inventory. The trick is that you should know exactly what you are filing for.
Two things can happen during write-offs if your stock levels are inaccurate. First, you can lose hefty deductions. The government knows what you are entitled to receive, but you must request it formally. You can receive up to 10% back in deductions if you do.
The second thing that can happen is that you file for incorrect deductions. When you have the right to a write-off but don’t file for it, the IRS does not take much notice of it. However, when you file for something you are not entitled to, the IRS will receive a warning. Not only do you risk an audit, but a fine as well.
Incorrect Amount of Inventory
While there’s no formula for how much inventory you should carry, you must be careful to create a balance. You may have too much stock, or perhaps the amount you have is too little. Regardless of the case, both can negatively affect your business.
For example, holding too much inventory can lead to increased costs for storage, safety concerns, and higher product obsolescence. On the other hand, if the stocks are too low, you can experience a shortage of products. This can lead to reduced cash flow and many unhappy clients.
How Much Can an Inventory Inaccuracy Cost You?
Depending on the warehouse size, a company with proper stock levels can spend around 5% of the product cost on the inventory. This cost can be about three times higher if inventory-taking inaccuracies exist.
An accuracy error can cost businesses anything from $10 to $250 per inventory product. This will depend on the total cost of the item and the processing level required for it.
The Bottom Line
There are various reasons why inaccurate stocks happen. And when you find yourself in this situation, you can experience significant damage to your business. Not only do you risk a cash flow and reputation problem, but it can also cause serious issues with the tax authorities. This is why you should conduct frequent inventories, employing technology to reduce these inaccuracies. Inventory management apps can be real saviors in the process.