How to Manage Business Inventory Risk

Inventory shrinkage is when the number of in-stock products does not match the stated amount on the master inventory sheet. A negative balance is more costly and troublesome than a positive one, but any inaccuracies can cause trouble over time.

Theft, incorrect physical counts, and poor record keeping are all possible culprits. While perfect accuracy may not be possible for businesses that stock hundreds or thousands of products, these tips can help you reduce overall inventory shrinkage:

• Limit access to areas where inventory is stored.
• Install security cameras in warehouses or storage areas.
• Designate specific employees to receive all incoming inventory. Develop a system for receiving that requires two more people to verify goods received.
• Recheck purchase orders, invoices, shipping receipts, and signed packing lists before you file them.
• Install a point-of-sale (POS) system to track outgoing inventory.
• Verify all invoices against order sheets twice.
• Choose shelving that allows easy access for stocking, counting, rotating, and cleaning.
• Organize the stock area for observation and movement.
• Take a complete inventory at least once every year. Investigate and account for discrepancies.

Spoilage is a significant risk for businesses that offer food-related services like restaurants, markets, hotels and motels, senior living facilities, and more. Improper inventory management is among the chief causes of perishable food spoilage. These tactics can help reduce your losses:

• Keep detailed records of use and only maintain a minimum inventory
• Practice the FIFO (first in, first out) method.
• Use easy-to-read labels detailing when a product arrived and its expected shelf life.
• Have regular maintenance checks performed on all cold storage units.

Overstocked products take up space you may not want to sacrifice, tie up capital, and complicate inventory management. Too much inventory often indicates poor recordkeeping and inattention to detail. Reduce and then avoid excess inventory with these tactics:

• Avoid new orders until sales catch up with stock.
• Cease selling slow-moving items.
• Sell your surplus stock at cost to free up working capital.
• Review sales data to anticipate demand and order inventory accordingly.

Some small business owners allow vendors to stock products in retail or wholesale locations and then leave a report. While seemingly more convenient, this approach can lead to the three inventory problems discussed above. The best way to mitigate these risks is to verify a vendor’s work by asking for written documentation or checking the stock yourself.

Ultimately, it is your responsibility to manage business inventory risks. Examine how and when products move in and out of your business. Find ways to improve record keeping. Create a plan to manage your products from orders to sales.

No matter how diligent you are, however, mistakes can still happen. Nor can you anticipate every risk. For added peace of mind, consider a business insurance policy that protects you and your business against financial loss related to your inventory. A local agent can help you assess risks and choose the coverage that fits your unique needs.