Expense Or Investment? What Are Your Company’s Inventory Costs?

Keeping an efficient control of your inventory will always be an investment for your company, not only because a significant percentage of the budget is directed to the area of ‚Äč‚Äčoperations, but because of the great benefits it brings in terms of the cash flow that is required to grow an SME.

For small and medium-sized businesses, inventory usually implies their largest investment. Therefore, understanding that effective inventory management is an effort that involves the various areas of the company and knowing the different costs involved in its control will help you make decisions that boost your growth.

How to increase your company’s return on investment

What is the return on investment of my inventories?

One of the most common concerns is knowing if your inventories are an expense or if they are truly an investment. Fortunately, there is a key indicator that allows you to easily evaluate the profitability of your inventories: the Gross Margin of Return on Inventory Investment or GMROI for its acronym in English or you can consult inventory management firms for your ease.

There are a large number of methods to improve your return on investment; one of the most important is undoubtedly reducing the costs associated with your inventories. Next, we will focus on these.

Freight cost

How to take care of the costs of inventories of a company?

A common mistake is to believe that the total capital invested in your supplies and merchandise is the only cost of your inventories. However, they should consider the costs related to the management, maintenance, and storage. The latter becomes between 20 and 30% of the available invested value.

We are already understanding why it is vitally important to take care of the costs of our inventories! Here are some of the main costs generated by the administration and storage of goods. These are classified into 3 categories:

Costs for placing an order

These are the costs generated by the activities related to the request for restocking. Then some of the main ones.

Processing costs: refers to the cost of all administrative activities to place the order. For example billing, communication, and accounting. These types of costs are considered fixed.

Transportation and reception costs: are those related to the transport and receipt of merchandise. This is a variable cost since the cost of transportation will depend on the volume ordered. The same goes for a receipt when downloading and inspecting the merchandise.

Storage costs

Each company defines the type of storage suitable for their business; this includes deciding whether their warehouses are rented or own. Additionally, there are costs for the management of inventory, equipment, maintenance of the establishment, services of the same – such as electricity and water – , insurance against theft etc. which is then looked out by the consulted inventory management company in India.

Breaking or lack of stock costs

That’s right, not having the necessary inventory to meet the demand at the time an order is issued generates costs and are usually the most problematic in business. These are not only possible lost sales, but include all costs related to additional orders, supplier changes, loss of customer loyalty, and, in the worst case, the total loss of one of them.

Understanding that all areas are part of great gear, as well as ensuring costs and effective inventory control is key to growing any business.

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