Money Matters

Preparing for year-end: how to manage inventory excess and shortages 

Year-end is a busy period for any business. Here's how inventory management can help you check the financial health of your business and increase your efficiency over the next year. 

Year-end is a busy period for any business. Here’s how inventory management can help you check the financial health of your business and increase your efficiency over the next year. 

Inventory is a specialized calculation that gives your business’s raw materials, goods in process, and finished goods an accurate value. Effective inventory management is invaluable when deciding which materials and goods to stock in what quantities and can highlight when to order more.  

Having a complete, 360-degree view of your inventory means your buyers can improve your supply chain, as and where needed, with the insights they need to negotiate better deals. 

Why inventory matters 

Think of your inventory as the lifeblood of your organization. Taking stock of all the goods and materials you hold allows you to plan and position your business activities for the upcoming year with clarity and confidence. 

Prepare for the coming year 

Medium-sized businesses often have long inventory cycles and extensive storage facilities, so you may find you only need to take a physical inventory count once or twice a year. 

Completing an inventory at year-end is an invaluable way to helpprepare your operations for whatever the coming year may bring.  

Build resilience into your operations 

Outside your organization, consumer trends and world events like a pandemic, political instability, or inflation can trigger unexpected and unpredictable changes in customer demand. And these can have a significant impact both on your inventory and on your broader operations.  

While coronavirus considered a black swan event and doesn’t represent a weakness in the global economy, it’s widely understood that global supply chain disruption, rapid technological evolution, and changing buying and selling habits mean that businesses have had to deal with an unprecedented range of radical changes at break-neck speed over the past couple of years. 

What causes inventory excess and shortages 

Closer to home, external events can lead to some product lines going out of stock. The result? Customer frustration, losing sales to your competitors, and a loss of loyalty and trust. 

On the other hand, if well-stocked product lines fail to sell, there’s the risk of becoming overstocked. In this situation, working capital can get tied up in the cost of carrying excess stock, causing an unnecessary financial strain on your business. 

Focus your attention 

Problems with the supply chain can put extra pressure on your business and impact your inventory. Having up-to-date visibility of what’s on the books in terms of the raw materials, goods in process, and finished goods you hold (as well as what’s most profitable and in-demand) can give invaluable insight on where to focus your time, money, and attention.  

For goods in process, all open production orders at the count date should reflect material issues to the production order and the latest value add operation.  

A fine balancing act 

Making the wrong call on which items to manufacture or replenish on your warehouse shelves can seriously damage your profit margins.  

The perfect balance, then, is to have sufficient product levels in stock to meet ongoing customer demand, increasing sales and profits while avoiding stock overages. 

Get this right with accurate forecasting, and you’ll be able to meet your fulfillment expectations and, simultaneously, increase customer satisfaction levels. 

Classification is key 

Knowing what’s selling well and generating profit can save you the cost of storing obsolete or expired goods in your warehouse. It can also leave you free to focus on those high-demand products you expect to fly off the shelves. 

The ABC classification used in many businesses is easy to apply with consistency. It typically looks like this: 

A: high velocity, high-demand, high-profit products  

B: medium profit, medium demand products  

C: low profit, low demand products 

Clear classifications allow you to set your warehouse policies according to demand. When you know which items bring in the most profit most often, you can assign prime space for them in your inventory.  

At the same time, those items you’ve moved into the C classification might find their way into promotions or liquidator sales to free up more prime storage space and release working capital.  

Optimize your business 

Done right, conducting a year-end inventory can highlight areas where you optimize the profitability of your business—saving costs, improving tracking processes, and increasing your future efficiency.  

Inventory management can also draw attention to areas of shrinkage and potential discrepancies, where reductions in actual inventory result from problems like damage, spoilage, theft, or human error over the course of the year.  

If you identify areas of shrinkage, performing a root cause analysis can help you to account for the discrepancies—and prevent future occurrences. 

Get clear visibility 

Effective inventory management enables you to track your spending better, lower costs, and protect your profit margins.  

With clear visibility of your inventory before each year begins, you gain insight into your company’s buying decisions and put your stock in the right place at the right time—and in the most cost-effective manner with confidence. 

In today’s fast-changing marketplace, the effective management of inventory excess and shortages creates more agile and resilient organizations—and supply chains capable of withstanding substantial fluctuations. 

Recession-proofing your supply chain 

For medium-sized businesses, conducting a year-end inventory often involves a complex matrix of multiple items, locations, and suppliers. Optimizing your inventory can play a crucial role in increasing your organization’s agility and resilience. 

Find out how updating your inventory planning processes and increasing visibility can help you build a supply chain capable of responding with resilience and agility to unforeseen external events—increasing productivity and enabling fast decision-making. 

Download our latest guide packed with expert tips on managing inventory excess and shortages.

Get your free guide

Hassle-free year-end operations  

Accounting software allows you to streamline your operations, prepare for your year-end close with ease, and help your business flow. 

Having the right tools on your side empowers you to keep financial focus and stay secure, compliant, innovative, and sustainable. Sage helps your business flow—without costly interruptions.