How to effectively manage merchandise stock for a balanced financial statement

Retailers must optimize inventory management to improve their financial health. Concerns about stock volume stem from the need to manage fluctuating demand and control the movement of goods, as these factors influence production and the financial statement.

How does inventory impact a store’s financial statement, and what are the best practices for daily management? Should retailers maintain high stock levels to ensure profitability? This article explores these questions in depth and offers the best strategies for effective inventory management.

Should there be a lot of stock for the balance sheet?

Inventory, from an accounting standpoint, represents the value of items owned by a store. It is a current asset, recorded in the company’s balance sheet.

Maintaining High Inventory: An Advantage for Profitability?

Keeping a high inventory can positively impact a retailer’s operations in several ways:

Reducing stockouts: Lowering stockouts helps prevent lost sales, particularly during high-demand periods.

Improved customer satisfaction: By maintaining a diverse inventory year-round, companies can adjust production and procurement to meet customer preferences for size, color, brands, and collections—offering better service overall.

• Increased impulse buying: A large inventory can prompt customers to make unplanned purchases. The wide variety of products often tempts them into impulse buying, which boosts sales.
• Better supplier negotiations: Stores that buy large quantities can often negotiate lower prices with suppliers, thereby increasing profit margins.

The Real and Financial Impact of High Inventory

However, maintaining high inventory has significant drawbacks, primarily high financial costs. More goods require more storage space, which leads to higher operational, insurance, maintenance, handling, and packaging expenses. This financial burden can impede other investments, like material or software upgrades, external growth opportunities, and marketing or communication strategies.

Excess inventory can often become a liability, leading to financial losses due to:

• Items becoming obsolete and losing value;
• Older products being replaced by newer ones.

In accounting terms, inventory can be a liability, and its changes significantly impact the income statement. Each stock movement must be accurately recorded and tracked in an inventory management system to reflect true financial conditions.

If the initial stock exceeds the final stock, it indicates destocking, resulting in an additional charge on the income statement. This unsold inventory, bought in the previous period, incurs extra costs in the current accounting period.

The decision to keep high inventory should be based on a comprehensive analysis of these pros and cons, considering available financial resources and other factors like:

• Stock turnover rate;
• Seasonal demand variations;
• Financial resources.

How to effectively manage inventory for a balanced financial statement?

Effective inventory management is essential for a balanced financial statement and sustainable profitability. Here are key strategies to implement.

Establish target stock levels

Determine the ideal stock levels for each item based on forecasts and supplier lead times. Utilize data analysis tools and specialized management software to set optimal minimum and maximum thresholds.

Establish reorder points to automatically trigger orders, preventing stockouts and ensuring consistent supply or production.

Optimize Order Quantities

The aim is to minimize storage costs. Account for target stock levels, reorder points, lead times, and safety thresholds, and determine the perfect order quantity for each item. Avoid over-ordering, which can result in surplus inventory and tied-up capital.

In retail, it’s crucial to adjust stock levels according to seasonal demand variations and market trends:

• Anticipate changes in demand and boost inventory levels accordingly to prevent stockouts of essential products;
• Lower inventory during slow periods to cut storage costs and reduce the risk of obsolescence.

Consider promotional offers

In inventory management, marketing strategies are vital. Employ promotions to clear excess stock and drive additional sales. Analyze campaign results to identify items most responsive to promotions and refine your current strategy.

Leverage stock transfers between stores

Transferring stock between stores is a strategic method for balancing inventory. It helps optimize physical distribution based on seasons, demand fluctuations, and the specific needs of each store.

This approach prevents both stockouts and costly excess inventory. Planned in advance, stock transfers can streamline transport costs, delivery times, product availability, and improve the management of perishable items.

Storage and inventory: keys to a successful financial statement

Efficient inventory management = healthier business financials

• Ensure inventory accuracy: Stock levels fluctuate quickly due to sales, returns, and new arrivals. Regular assessments keep inventory current and reflect its actual value.
• Identify market trends: Analyzing inventory data reveals trends, helping stores adjust raw material purchasing strategies to maximize profits and meet customer demand.
• Detect potential problems: Regular stock assessments can uncover issues like chronic stockouts or overstocking, allowing retailers to take corrective actions before they negatively impact the business.

Inventory methods to favor for accurate evaluation

Multiple methods exist for inventory evaluation, depending on factors like store size, stock volume, and available budget.

• Annual inventory: Offers a snapshot at a specific time, usually during stock account closure, to adjust entries accurately. Conducted at the end of the fiscal year, it requires time for physical counting, which may necessitate store closure and incur costs.
• Perpetual inventory: Involves counting inventory continuously throughout the year. It’s less costly than annual inventories, both financially and in terms of time. However, it requires precise product classification (ABC classification, 80/20 rule).

Continuous inventory: Real-time stock level tracking using management software, with automatic updates upon product receipt or sale.

Leverage automated management

Automated inventory management delivers detailed analysis of stock status, ensuring heightened accuracy. Real-time tracking minimizes human errors, providing stores with precise, immediate inventory views, enabling informed purchasing decisions and preventing costly stockouts.

Automated systems also lower storage costs by eliminating time-consuming manual tasks and reducing losses from product obsolescence. The entire supply chain gains from real-time tracking:

• Tracking product inflows and outflows;
• From stock reception to order shipment.

Products reach shelves faster, enhancing customer satisfaction.

Inventory management software is a powerful decision-making tool. It provides essential data on stock levels, market trends, customer purchasing patterns, and predictive demand analysis. This enables retailers to develop effective strategies for purchasing, marketing, planning, and inventory management.

Interested in enhancing your in-store inventory management further? Read our article on store inventory management.

For retailers, precise stock control reduces costs, improves efficiency, and ensures customer satisfaction. Hence, adopting inventory management software is highly recommended, as it directly contributes to profitability, customer retention, and sustainable growth.