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The Importance of Accurate Inventory Forecasting

Posted by Carlin Culbertson on Jun 14, 2019 10:56:00 AM

Young Man Stocktaking of ProductForecasting is a key element in conducting your business. The realism that good forecasting provides can help you develop and improve your strategic plans by increasing your knowledge of the marketplace. The forecast that your sales force provides is the source of information that allows you to manage virtually all aspects of your business.

So, why is accurate inventory forecasting so important? Inventory changes constantly. Throughout each day, sales, returns, new receipts – even damage and theft – affect your inventory levels. While daunting, keeping track of it all in real time is one of the most important jobs in a successful retail or wholesale business. Think about it: If we could somehow forecast with 100% accuracy, we'd be able to carry only the inventory we plan to sell, with maybe a little extra to cover for unexpected mishaps.

Forecasts cannot be open to interpretation, but it is inherently challenging and will never be perfect. The whole point of a forecast is that it’s supposed to give you guideposts for what your actions are, how you allocate your resources, and what you spend your time focusing on. If the information is not accurate, it can affect everything else.

The following seven tips can help you reduce inventory carrying costs:

  1. Order only what you need – instead of ordering a bulk amount, think about whether you really need it. If you know you’re going to need it, order it in advance to avoid rush shipping cost.
  2. In turn, insurance costs will decrease if you’re not insuring as much product.
  3. Warehouse/storage size – if you’re not carrying as much, then you can save costs on warehouse expenses such as rental fees, real estate taxes, and utilities.
  4. Keep your warehouse organized and efficient. Much time is wasted endlessly searching for inventory.
  5. Consignment inventory is a strategy in which you store items and pay the supplier after the goods are consumed.
  6. Work to get a better idea of what your safety stock should be and reduce it. This can be achieved through better financial forecasting methods as well as using different vendors and partners rather than keeping all your stock on hand.
  7. Last, but not least, a perpetual inventory system is the preferred method for tracking inventory since it can yield accurate results on an ongoing basis. A perpetual inventory system accounts for inventory in real time immediately after the sale or purchase through the use of a computerized point-of-sale system and financial forecasting software. It provides up-to-date inventory balance information, requiring less physical inventory assessments.

Forecasting inventory provides many benefits, including opportunities to increase customer satisfaction by providing the product they want when they want it, maximizing profits by having products on hand and decreasing costs by carrying less excess inventory. Being able to anticipate sales and reorder estimations gives you better visibility into the health of your company. When you have a good grasp on it, you can allocate time and money to other important areas of business operations, leading to a more successful and profitable business.

Please contact Meaden & Moore if you have any questions or would like to discuss financial forecasting methods for inventory reduction that can help you cut costs.

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Topics: Accounting & Auditing

Carlin Culbertson

Carlin Culbertson

With over 15 years in public accounting, Carlin has extensive auditing experience serving a wide variety of clients in various industries, including construction, manufacturing, mining, biotechnology and distribution.