Part VI — Do Changing Costs Go Unnoticed?
As we continue our 10-part series — 10 Ways Inventory Management Can Make Or Break You — we now look at how changing costs in inventory can impact your bottomline if you are not aware of the new costs soon enough. This is where a purchase order module integrated with your inventory, and POS, would be of great value.
If you would like to read this paper in its entirety, 10 Ways Inventory Management Can Make or Break You, click here. To simply find Parts I-V click here.
Part VI: Do Changing Costs Go Unnoticed?
The details of how costing changes affect your business may vary widely, but if inventory is a large part of your business these changes will have an impact. When items are sold the simplified bottom line is that the profit for the company is based on the sell price being high enough to cover all costs and produce a profit. As a result, any changes to the cost structure can impact profit. In the case of inventory this profit will change whenever the cost of an inventory item changes. In many cases the sale price may be set up to absorb any changes in cost but if costs change and sale pricing isn’t updated soon enough you may be missing out on potential profits or even losing money.
In the event the sale price is a margin of the cost of your items a good Inventory Management system will automatically adjust the sale price and you can always be assured that when an item is sold you are getting the profit you want. However, in many situations it is not practical to have the sale price fluctuate freely with the cost of an item, especially when cost fluctuations are common but don’t indicate an overall increase in costs that require an increase in price. Or, alternatively, in a cost sensitive market or business a change in the sale price may have a dramatic impact on sales and so management may need to carefully consider any pricing changes.
In this case it would be possible for a cost to increase and to have items sold at a loss before the change is noticed or before management has the opportunity to review the pricing and adjust it accordingly. Do you know if your costs have increased? Or how the inventory costs might be impacting sales prices and profit margin? If not, you may want to consider investing in a more robust Inventory Management system.
If that’s the case then you would want a purchase order module that compares the cost of items received with the items already in inventory. If the price changes, a report that not only shows the change but shows the impact to your sale price and profit margin based on the method of valuation and pricing you have set up in the software is invaluable. This helps make sure inventory costs are addressed immediately, if needed, to avoid any loss in profit.
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