inventory how to why every year

Why We Take Year-End Inventory & You Should Too!

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This January, as we do every year, we are closing for part of the first week to run inventory here at Essential. We do this for many good business reasons, including to keep accountants happy and better forecast the next year. Counting inventory is critical for every commodity business, and in our case it means that we will be unable to ship orders and production will be closed for the week.

Our first shipping date and start of production in 2020 will be January 6th. Although our customer service will be open and our website can receive orders, most of our staff will be busy in our warehouse.

Why We Take Inventory

There is almost $2 million in inventory in our building in the form of premium ingredients, finished goods, packaging, and labels. There are over 10,000 SKUs to account for, and that requires weighing every ingredient and counting every unit of finished goods. Our warehouse is almost 50 feet high, so this also means some brave and dexterous souls will be hauling  pallets of drums down from more than twenty feet in the air with forklifts to measure their contents. It’s certainly a time-consuming and complicated operation here, and we hire outside auditors to monitor our procedures and processes and confirm the accuracy of our inventory controls.

What’s the Purpose of Checking Inventory?

We go through all this hassle for a few very good reasons — reasons that might make sense for your business, too.  Firstly, inventory management is critical to any company’s financial success; it’s where your money is held until it is converted back to cash via a sale. Secondly, keeping an accurate inventory count is needed to to meet demand from customers and keep a good supply of finished product on hand at all times. Let’s break it down.

Accounting & Cash Flow

To run a business well, accounting needs to know how much of your cash is held in inventory, both in the materials used to make your product (if applicable), and how many units of finished products you have to sell. You don’t want too much in inventory because it takes up space, locks down some cash, and depending on your products, it can even expire and go to waste. At the same time, you definitely don’t want to underestimate how much inventory you need to have on hand to meet customer demand.

Lead Times & Ready Stock

Keeping customers happy is how you keep a business afloat, and that means keeping enough stock on hand at all times. We recommend keeping 4-6 weeks’ worth of finished goods in inventory, and that probably means carefully considering typical buying schedules of your customers, contracts about to renew, and seasonal events that affect purchasing. This also means understanding the lead times throughout your entire supply chain.

If you place an order last-minute with your manufacturer (us, for instance), we will try and turn your goods around as quickly as possible. However, we are also subject to ingredients arriving on time, crops remaining steady, demand from other customers, and no shipping issues. But your manufacturer is just one player—your packaging and label suppliers also need a suitable heads up. Checking inventory levels is the only way to stay on top of the ordering process of your own supply chain. If you know you have an unusually large order coming up, a recent inventory helps you plan without wasting time and money on guess work and missed deadlines.

Depending on the size of your business running inventory may be a major operation or else easily done in an afternoon or less. Regardless of your size, hopefully this has laid out a rather simple case for counting inventory, and helps explain why we prioritize it at the beginning of every year. Let us know what additional steps you take in the comments below, and Happy 2019!

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2 years ago

Thanks for some practical info…! Although I’m a seasoned business owner who is used to this process, I’m sure the info was new to some and will encourage them to follow through with this standard practice.

1 year ago

Love it! This would be my first year doing our inventory count. I’m excited and daunted at the same time but I can do it.

1 year ago
Reply to  Anne

You’ve got this Anne!