It has always been important for e-commerce businesses to manage their inventory, but Amazon’s change to the way that fees are invoiced, which now include VAT, brings that into even sharper focus.

Reducing inventory has a number of advantages:

  • Better Cash Flow: the more inventory you have, the more cash you have tied up. Holding too much inventory is one of the biggest drains on cash resources.
  • Less waste: the risk of waste will vary dependent upon the nature of that stock, but it could be damage, expiry dates, damp, mould, or corrosion. The less stock you have, the lower the risk of stock going unsold.
  • Flexibility: e-commerce is a fast-paced environment, and businesses sometimes need to pivot their offerings. Businesses with lower stock are more adaptable.
  • Lower costs: lower costs might be achieved by a reduction in storage costs.

However, we can’t ignore the disadvantages:

  • Stock Outs: The more stock you have, the less likelihood that you will have stock outs and lost sales.
  • Reliance on Suppliers: If you maintain stock low you will need suppliers to deliver on time to avoid stock outs and some delays may be outside their control. This reliance doesn’t just refer to the suppliers that supply your products, but the carriers that ship them.
  • Some higher costs: The best price for a product is often achieved by buying in bulk. Shipping costs will also be lower. You will need to be sure that these additional costs are outweighed by the benefits of low inventory.
  • Unsatisfied customers: If demand cannot be satisfied, customer loyalty can be impacted.

Inventory management is therefore a balancing act and an effective inventory management system will be crucial to success, whether you stock inventory in your own warehouses, use fulfilment partners (3PLs), or dropship.

Inventory Reduction Strategies

  • Demand forecasting: most inventory management systems will have a forecasting model that uses historical data to create a buying plan, which tries to anticipate surges and troughs.
  • Evaluate safety stock: no matter how good your demand forecasting is, you should have a level of safety stock to ensure you can meet unexpected demand.
  • The 80/20 rule: otherwise known as the Pareto principle, it is so often the case that 80% of revenue comes from 20% of products. Some products will therefore require greater focus as they are more critical to the success of the business.
  • Stocktakes: even if you do have a good inventory management system, holding regular stock takes will ensure that inventory is accurate. The lower you maintain stock levels, the more crucial data accuracy becomes. Many businesses will undertake an annual stocktake for audit purposes and to ensure that annual accounts are accurate. But discrepancies found are difficult to trace and account for if the count is only annual. This can be supplemented by having a rolling stocktake schedule and spot checks.
  • Don’t hold obsolete stock: holding stock that is difficult to sell can be more expensive than taking the hit on selling it cheaply. This can even apply to slow moving stock when it might be cost-effective to at least sell some at reduced prices.
  • Reduce lead times: it is common practice for businesses to have to pay around a 30% deposit on inventory orders before the manufacturing process starts. You will need to work with your suppliers to be sure that the time from order to delivery is minimized.
  • Minimum Order Quantities: although ordering more to obtain better prices can be effective, we have also seen that ordering less can also save costs. Some suppliers may even set Minimum Order Quantities, but you can also set these yourself at a level that gives you the optimal balance.
  • Supplier Review: if your suppliers are causing a cash flow drain with long lead times, then you may need to re-evaluate your suppliers.
  • Relationships: maintaining a good relationship with suppliers is vital to a rewarding partnership. Whilst we did suggest above that better payment terms will help cash flow, whatever those terms are, meeting them is vital to a good relationship.

Final Thoughts

Inventory management is crucial to the success of e-commerce businesses, and management shortfalls can quickly become problems that result in lost customers and profits.

How Can We Help?

At Elver E-Commerce Accountants we specialise in assisting e-commerce businesses with the unique tax and accounting challenges that e-commerce businesses face, whether that is navigating the complexities of accounting for e-commerce sales, VAT, both domestically and internationally, to cash flow forecasting, management accounts, sourcing and assisting with loan applications and advisory services. If you would like to discuss how we can help, please call 01942 725419 or use the contact form to book a meeting.