The post-holiday season is the time for taking a physical inventory of your merchandise and restocking your shelves. According to U.S. Census Bureau information reported by Trading Economics, inventories in general rose at the highest level in October 2021 were the highest since May 2011. Sounds rosy? If you’re an inventory-based business, things related to your items haven’t been easy in recent months and likely some problems will continue.
Here are some challenges you may or are likely to face in optimizing your inventory and what you can do about them.
Inflation
Inflation has both a financial and tax cost for businesses. Financially, you’ll likely pay more for new items to stock your shelves. From a tax perspective, inflation can mean you’ll be reporting more income. Why? Most small inventory-based businesses use FIFO (first in first out) to value their inventory. This means that if the same items are acquired at different times, when figuring income from sales, the earliest items acquired (likely at the lowest cost) are taken into account first for the cost of goods sold, which has the effect of increasing gross profits.
What to do:
You may want or need to raise your prices to keep pace with the higher costs you face for new inventory items. Businesses typically stick with their inventory method (e.g., FIFO), but could make a change. Switching to LIFO (last in first out) may reduce profits in the short run. But there are tax costs to making a change. Discuss this option with a CPA or other tax professional.
Supply chain disruptions
According to Accenture, 75% of companies said supply chain disruptions have had negative or strongly negative impacts on their business. And 55% of companies have or plan to downgrade their growth outlooks as a result of supply chain disruptions. In simple terms, supply chain disruptions mean you may not be able to obtain inventory items when or to the extent needed.
What to do:
In the short term, you might find other suppliers to purchase the same or similar items needed. In the long term, think about how you’re sourcing your inventory. Perhaps buying products “Made in the USA” where possible will avoid the problems seen at the ports. To get you started, here’s a directory of 800+ companies making items in the U.S. The Administration has proposed a Buy American Rule for the purpose of supporting American workers.
Customer uncertainty
Customers are fickle. An item that’s hot today may fall out of favor and kill demand tomorrow. Consider home exercise equipment that was on fire earlier in the pandemic, but demand has now softened.
What to do:
Continually monitor what customers are buying and what financial challenges they may be facing. Use inventory management software not only to monitor what you have on hand but also to determine what is or is not selling so you can better analyze customer demand. In 2021, Capterra posted a list of inventory management software. Check for new options in 2022.
Final thought
A previous blog suggested that the just-in-time inventory model may no longer be suitable given today’s current conditions. It also suggested using inventory management software to better handle your items. Handling inventory in 2022 requires “all of the above” action so you don’t needlessly tie up capital or disappoint customers. Good luck!
