How to: Manage Inventory If you don't know what's in stock, there could be trouble in store.

Ruth Kelsey's method of tracking inventory for her giftbasket business, Brittany's Balloons and Gifts, used to beinformal--to say the least. "I was going by sight,"recalls the Lithonia, Georgia, entrepreneur. "Basically, Istored everything in my den and garage, and every so often I wouldcount it all."

As Kelsey's business grew and expanded to include partydecorations, her inventory system became inadequate. "I wouldthink I had 20 baskets left, then I'd go to fill several ordersand find I had only 14," she says. "That would put me ina pinch, especially in my busy seasons." Kelsey is in theprocess of computerizing her inventory, which she expects to giveher a more accurate method of tracking.

Inventory can make up 50 percent or more of a business'scurrent assets, and poor inventory tracking is a major factor inbusiness failure. "You want to make the best use of yourcapital," says Bruce Cohen, managing partner of the Albany,New York, office of accounting firm Coopers & Lybrand LLP.

"How can you manage your business unless you know how muchinventory you have, what it cost and where it is? You'reguessing," Cohen says. "I've seen a number ofcompanies that guessed wrong over the years--and they're out ofbusiness."

Jan Norman is a freelance writer who specializes insmall-business issues. She can be reached at jnsmallbiz@aol.com

Buying Guide

The goal of inventory management is to keep you informed aboutthe quantity of each product or component in stock. Thisinformation is your guide to what, when and how much to buy.

If you have too much inventory, you tie up cash inproducts--money that could be better used for running yourbusiness. Unsold inventory costs a company in several ways, Cohensays. You pay for space to store your products; large amounts ofinventory are more susceptible to theft; and some states taxinventory separately, so companies with large amounts of inventorypay higher taxes.

Too little inventory can be as big a problem as too much. If youdon't have enough of an item on hand, you lose sales becauseyou can't fill orders promptly.

How do you know if you have inventory problems? Cohen liststhese danger signs:

• Inventories are climbing faster than sales.

• Back orders are piling up.

• Customers complain that products are unavailable.

• Production is interrupted because of lack of materials.

• Inventory turnover rates are slower than you expected.

How quickly you turn over inventory is an important measure ofyour business success, says Jon Schreibfeder, president ofEffective Inventory Management Inc., a Coppell, Texas, consultingand seminar firm. Turnover measures how long it takes to sell acertain amount of product. "Distributors, retailers andmanufacturers who have 20-percent to 30-percent gross profitmargins should strive to have a turnover rate of five or six timesa year," Schreibfeder says.

Your company can increase its turnover by placing smallerorders. If you sell $10,000 worth of a product in one year,you'd make better use of limited capital by ordering $2,500worth of the product four times a year rather than tying up theentire $10,000 in inventory for the whole year.

"Even if you've budgeted for losing money at first, youneed to generate cash to pay bills," Schreibfeder says."In order to generate cash, you must sell the materialyou've bought as quickly as possible."

Another tip: "Special-order only the number of items yourcustomer will commit to buying," Schreibfeder says. "Ifyou don't negotiate a good return policy [with the supplier]and you can't sell all the merchandise, that's money downthe drain."

Know It All

The potential for getting stuck with unreturnable inventory isone reason business owners need to monitor what is and isn'tselling. Schreibfeder recommends tracking each item separately. Youneed to know not just that you're selling 20 blouses per week,but how many blue ones and how many red ones.

Inventory management is his company's biggest problem, saysJulius Howell Sr., owner of Deep Reflection Products Inc., aGoldsboro, North Carolina, company that makes and sells specialtycleaning products for the automotive, marine, recreational vehicleand janitorial industries. Deep Reflection must track ingredientsand production supplies as well as the finished products itsells.

Howell used to do inventory by hand. "It didn't workwell," he says. Now he uses a commercial software package thatrecalculates costs and markups in four different customercategories every time he reorders supplies. The software won'tallow him to write an invoice for an order if that order willdeplete his finished inventory below a specified amount.

Although Deep Reflections uses a sophisticated software programto accommodate different types of customers, many small companiescan manage their inventory effectively with inexpensive softwareprograms such as Peachtree Accounting (Peachtree Software Inc., $69to $249, http://www.peachtree.com) andQuickBooks (Intuit Inc., $99.95 to $199.95, <ahref=http://www.intuit.com/quickbooks/>http://www.intuit.com/quickbooks/).

Fire & Spice Inc., a Destin, Florida, seller of hot saucesand gourmet condiments, uses QuickBooks, says Ann Reaves, co-ownerwith her husband, Bill. The company sells its own products, made bya contract manufacturer in Louisiana, as well as products fromother food manufacturers. QuickBooks lets the entrepreneurs keeptrack of each item by company. The Reaveses are able to set thereorder point for each item separately, which is helpful becausesome items sell faster than others.

Even the smallest companies can use technology to help manageinventory, says Cohen at Coopers & Lybrand. Most products nowcome with computer bar codes, so distributors and retailers canscan in each item and track them all with a personal computer."There are many software products on the market now for smallcompanies," Cohen says. "Look for general accountingpackages with integrated modules for inventory. They tell you salesinformation, who your customers are and what they're buying,and they tie in to invoicing."

All Systems Go

Computers alone don't solve inventory problems, Schreibfedercautions. "Computers are merely tools. They must be used inthe proper business environment in order to work effectively,"he says. To create that proper environment:

• First, establish a complete list of every product or componentyour company buys.

• Assign a specific location in your warehouse or storage areafor each item.

• Process paperwork quickly--daily, if possible.

Make sure stock balances are always accurate. Schreibfeder says"cycle counting" is better than a once-a-year physicalinventory. Cycle counting is an ongoing inventory. You can start atone end of the warehouse and count all the items on one shelf or inone bin each day until you reach the other end. Or you can countall of a specific product, then work your way through your entireinventory. Either method usually adds up to a full inventoryseveral times a year.

• Set up procedures for reordering to help inventory turn overfaster and prevent running out of any item.

• Establish inventory goals and compare them each month withactual results.

• Determine how to handle unsold products, whether by returningthem to the vendor, discounting the price, donating them to charityor throwing them away and writing them off the financialsheet.

"Many business owners load up with inventory withoutunderstanding what is and isn't going to sell,"Schreibfeder says. "They let their vendors tell them what tobuy." You need to recognize that vendors, while not dishonest,have different objectives than you do.

As a new business owner, Schreibfeder says, you must rely oncareful research to determine how much inventory to buy initially.Once your business is up and running, let a well-thought-outinventory management program guide your purchases.

Contact Sources

Brittany's Balloons and Gifts, 4992 Herrenhut Ct.,Lithonia, GA 30038-2783, (770) 593-3458

Coopers & Lybrand LLP, http://www.colybrand.com

Deep Reflection Products Inc., (800) 766-3856

Effective Inventory Management Inc., (972) 304-3325,http://www.effectiveinventory.com

Fire & Spice Inc., 757 Hwy. 98 E., #14-246, Destin,FL 32541, http://www.fire-spice.com