Introduction to Average Inventory Calculation:
Accurate calculation of inventory is the major operation of any business that must be done efficiently and under strict supervision. It will provide you with complete information regarding the position of your business in the market. In addition to this, after calculation of the inventory, you would be able to know if you are competing with your rivals in a good way or not. Furthermore, the inventory management system is the base of your business that should be built on solid grounds so that you are able to deal with every difficulty. This is why we need to understand the importance of Average Inventory Calculation. Plus better management of your inventory would enable you to cope with situations like having too much inventory on hand, re-order points of stock, fluctuations in supply chain management, etc. We all know that all these matters should be handled effectively to avoid any kind of mishap in the future.
However, using automated inventory management software like Inventooly would prove a great help to manage your business’s inventory and automate all the operations. It will also help you to fasten your activities related to the inventory of your business and produce more accurate results.
What is the Average Inventory?
The average inventory of your business could simply be understood as the amount or the value of your inventory over a specific period. It is no doubt that seasonal or occasional factors have a major impact on the normal workings of your business’s inventory. You could see a major rise in the sales and buying behaviour on the part of customers which could indicate a shortage of inventory. On the other hand, when the inventory is bought by the business on peak and there are fewer sales, which leaves your business with too much inventory on hand.
Furthermore, such types of fluctuations and variations in your inventory make it difficult for your business to estimate the actual value of the inventory over a specific period. Here the average inventory calculation comes to the rescue. Because it considers such factors as a whole and then eliminates them from your inventory providing you with the correct condition and position of your business’s inventory through a specified period (it could be monthly or even yearly estimation).
Following are stated some of the benefits of using average inventory calculation:
- It saves your time.
- Easy and simple to use.
- Helps you to handle price fluctuations.
- It is cost-friendly.
- Gives you accurate results for certain periods.
The formula of Average Inventory Calculation:
You can simply calculate the average inventory of your business by taking months or yearly estimations too. For instance, if you have to calculate it for a whole year, you can add up the amount of inventory after the end of every month, and then divide it by 12. It will give you the result of the average inventory of your business through a whole year.
Similarly, when you just want to calculate the average inventory of a single month, all you have to do is that you can add the opening value and the ending value of the inventory of that month and then divide it by 2 to get the result. It is as simple as that your! The formula of average inventory calculation is written as:
Average Inventory = (Current inventory + Previous inventory) / number of time periods
Dangers of too much inventory on hand:
It is no secret that when a business buys stock in bulk so that it could be preserved in the inventory of the business for future use, it makes sure that the future needs of the customers are fulfilled. But if the customers don’t need that product in the future? What will happen then? Your business will be left with too much inventory on hand, which will be a great threat to the profit of your business.
Moreover, one needs to understand that while working or running a whole business he should be aware of what is coming in the future. In simple words, the correct speculation should be done to prevent too much inventory on hand. You can never be able to enter new products and focus on enhancing your services if you are stuck with the old inventory at the same time. Following are some of the great dangers that your business will face if it has too much inventory on hand:
- Storage costs are increased.
- Profit is reduced.
- Repair and maintenance costs of the excess inventory increase.
- Cash is tied up.
- The quality of your products is affected.
- Loss of Customers.
- Dead or Expired stock situation occurs.
Ways to reduce too much inventory on hand:
As discussed above, having too much inventory on hand could cause you the shut down your whole business. You are not doing well in your business if such kind of situation occurs. Therefore, every possible measure should be taken to avoid or step out of this huge problem. In addition to this, using automated inventory management software like Inventooly could assist you in the effective management of your business’s inventory.
Furthermore, such types of software will inform you in case of any threat or risk coming towards the inventory of your business. And also you will be able to know what the position of sales is and what stock is to be bought and what is not to be ordered more.
Below are discussed some of the important as well as effective ways to reduce too much inventory on hand:
- Auction your inventory:
Presenting your excess inventory to the public through auctions could be a great way to get rid of too much inventory on hand. You could easily target your interested audience and display your products in front of them offering to sell. With the help of an auction, you can see the interest of your relevant audience and sell your inventory at a reasonable bid so that you could easily be free of the excess inventory of your business.
However, automating your inventory management system and using digital software for the effective running of the supply chain of your business would be a great way to manage the excess inventory of your business. You will be alerted about the threats coming in your way in advance so that you can take proper measures in a short time.
- Market through digital platforms:
Marketing your excess inventory on the digital and most frequently used platforms like social media will be of great help for your business. As we all can see that the usage of social media is increasing every next day, therefore using it for the remarketing of your excess inventory would be a great way to get rid of too much inventory on hand. One way to complete this task is by marketing through digital platforms like Instagram, Facebook, and LinkedIn, etc. By doing so, you might get a better payback of your excess inventory, and entrance into a market that may prove to be beneficial to you in the longer run. Numerous bodies are looking for old stock to fulfill their requirements which can be of various natures.
People are always attracted when something new and unique is offered in front of them for purchasing. Likewise, classifying your thoughts and using innovative methods for the marketing of your inventory could prove as a great initiative in terms of selling your inventory.
- Scrap and eliminate the dead or obsolete stock:
It is no doubt that when a product is kept for too long, its life and usage time decreases. Therefore, if your business is keeping too much inventory on hand, you must know if all of the products are working as newly bought or not.
Scrapping the inventory and identifying the dead or obsolete stock would be the first thing you will need to do to get rid of excess inventory in your business. You must know that which of the stock in your business’s inventory can no longer be used or is expired so that you can just throw it away and make room for the new products to enter.
- Automate inventory system:
Automating the inventory management system of your business could be another way of handling too much inventory on hand. Because it will let you know from time to time which products are being sold the most and which are failing to get the attention of the public.
Another advantage of using an automated inventory management system is that the manual work of your business is reduced to a great extent. This proves very useful in terms of reduction in errors or mistakes in the inventory calculation. By this, you will be able to know that what your next step will be in terms of expanding the sales of your business.
- Using raw materials for other products:
Another way of handling too much inventory on hand is that if you have already ordered raw materials, you can put them into use during new products being manufactured. By this, you will be able to utilize the ordered raw material also and not produce the same old inventory that will just eat up the costs of your business.
If you have reached the end of this article, you will now be able to know the importance of average inventory calculation and how to calculate the average inventory of your business. In addition to this, all the necessary information regarding holding too much inventory on hand could be obtained from this article. Just focus and set up your mind and you will get every possible solution relevant to the problems of the inventory of your business.