6 Ways Overstocking Costs your Small Business
It is very crucial to understand all the tactics related to running a successful business when you are stepping into this world. Make sure you are doing the right thing and executing each and every step very mindfully avoiding any kind of error or mistake. The inventory management system of your business should be able and strong enough to handle any kind of risk or threat coming in your way. As we are aware that the trend is changing with each day in the market so as the demands of the customers.
However, when a company fails to understand this situation and order too much inventory at the same time, it creates a huge problem of overstocking. Which in turn not only affects the costs of your business but also drives away all the customers that you have built over a large period of time. Therefore, it is very essential to understand each and every sector related to the inventory of your business to avoid the increase in overstocking costs.
What does Overstocking mean?
Before diving into what this great problem entails, let us understand it fully. So overstocking can be simply comprehended as the situation in which a company orders too much stock but is not able to sell all of it right away. This creates a chaotic situation in the company because too much stock is left overlaying in the storage houses that affects the current dealings of your business. Therefore, overstocking is also called “bad inventory”.
However, when there is a problem, it is for sure that its solution is also out there somewhere. Similarly, overstocking inventory could be handled through several ways from which the ideal one is the liquidation of your inventory. It means to sell all the excess stock to a liquidator at a reasonable price. Or another terrific solution to your overstocking problem is that you could utilize an automated inventory management system that will guide you to manage all the inventory effectively to avoid such situations ad run your business smoothly in the future.
Ways in which Overstocking Costs your business:
It is no secret that overstocking costs a lot to a normal business, however, when the size of your business is small or medium you should be more careful in every regard. It is obvious that when a stock is lying idly in the warehouses of your company, it will require constant attention and costs, nothing more. In order to do so, you will have to take out a portion of your business’s profit to fulfill these requirements. That will in turn lower down the ROI (Return on Investment) ratio of your small business. Therefore this overstocking problem must be solved as soon as possible.
Below are stated some of the obvious effects that overstocking costs your small business;
- Your cash is tied up:
When you have a large portion o inventory lying down in the warehouses of your business, all the cash spent on them is tied because of not being sold. It only costs your small business more and generates no profit at all. Your cash is still sitting in your own storage houses in the form of overstocking inventory. However, using an automated inventory management software like Inventooly could help you to a great extent in order to manage the overstocked inventory of your business and ease out the work for you.
- Increased Storage costs:
As we are aware that when a specific portion of the inventory is bought from a supplier, you have to pay the holding costs until the time it is sold to the consumers. Therefore, when an overstocking situation arises in the business, it increases your storage or holding costs on that inventory. It is then your responsibility to pay it without delays to avoid arguments with your suppliers.
However, increased storage costs will only be a burden for your business because it is decreasing the profit margin of your business. Nobody wants that right? Therefore, to escape from such a situation you can sell the overstocking inventory at a reasonable price offered by a liquidator. By this, you will be able to red rid of the stock as well as worry about the lowering down of your business’s profit.
- Risk of product expiration:
It is no doubt that when a product or inventory is lying for a long period of time without being able to use it, it will lose its quality and expire after a certain time. After this, you will not be even able to sell that product to the public because it will be of no use. This causes a major setback to the reputation of your business.
In addition to this when you are dealing in a small business, the number of products which you are selling is also minimized. The owners, in such a position often decide that they should fully stock these products for the future. But nobody knows what trend will be coming in the future. Therefore, in order to avoid this situation, you will have to conduct important measures to prevent overstocking inventory in your small business.
- Obsolete or dead inventory:
When an overstocking inventory is lying in the warehouses of your business, it is very difficult for you to search for new products and still manage the old ones. The constant delay makes your inventory dead or obsolete, which means that they can not be used now. It becomes useless which means all the cost you have spent on buying that inventory has returned you nothing. All your money invested is wasted and ruined. Every business is scared of such a position, therefore, it is very important to effectively manage the overstocking inventory before it leads to becoming obsolete.
- Unbalanced cash spent:
When running a small business, it is very obvious that you will spend a large amount of cash without any check balance on the inventory of your business. But it also put you in a complex situation as you are spending all of the money on the purchase of inventory. Therefore, it is very essential to keep a check upon the balance of your cash spent over the stock, you must save a good amount of cash for later usage. Installing automated inventory management software could help you to avoid such problems related to your inventory.
- Risk of Economic down-turn:
Another problem that will be faced in terms of overstocking is the risk of an economic downturn in the future. Who would know that what condition will be prevailing in the future? Many businessmen stock their businesses due to the thought that they would sell them for higher prices in the future. But what if the product is not demanded in the future and the price decreases? It will affect the cost of your business. Therefore, you should prefer to liquidate your inventory and also sell it before it becomes obsolete or expires because it will cause you to overstock costs to your business to a great extent.