Four common Inventory Management System mistakes (and how to avoid them)

Four common inventory management system mistakes and how to avoid them

Inventory management is the backbone of every retailer – but without an effective system in place, it can soon become your Achilles heel.

Any business that handles stock needs a system for tracking and controlling it. Without clear visibility of your inventory, you’ll soon find yourself overstocked or understocked, and you won’t be able to maintain healthy margins.

That’s why Simon Davis, SBO Financial’s Head of Business Development, says taking control of your inventory is one of the most important parts of running an eCommerce business.

“Knowing what you have in stock at all times allows you to make informed decisions around when to purchase more stock and how much is appropriate to carry, and it helps you to set your prices,” he says.

“It doesn’t matter if you have the best brand and marketing in the world – if your stock runs dry, or worse, if you start haemorrhaging cash, then you won’t have a business for long.”

An Inventory Management System (IMS) is a software tool you can use to track inventory levels, orders, sales and deliveries. There are plenty of these tools on the market, and they all have slightly different functionality and integrations, but they’re ultimately intended to help make sure you’re ordering the right stock, at the right time, and in the right quantities to avoid overstock and outages.

This software sits between your Sales and POS platform and accounting system, and should integrate with external partners such as logistics and fulfilment providers (3PL) and external commerce platforms, such as Amazon.

An effective IMS leads to well-managed stock, satisfied customers and a healthy profit margin – but implementing an IMS can be easier said than done.

“You wouldn’t believe how often we field inquiries about botched IMS implementations,” Simon says. “It’s an extremely common problem for eCommerce businesses.”

Here are four of the most common mistakes businesses make when implementing an IMS – and what you can do to avoid them.

Over-customisation

In the pursuit of familiarity, businesses often attempt to tweak their IMS to suit their workflow. On the face of it, it seems like this customisation would be a good thing, but in Simon’s experience, businesses often take this too far, and negate the benefits of having an IMS in the first place.

“They try to make the IMS fit into their existing process,” he says. “The problem with this approach is that they probably implemented the IMS to fix a problem, and that problem is usually part of their process.”

That’s why Simon suggests businesses need to shift their mindset when implementing an IMS. Rather than attempting to make it seamlessly fit into their workflow, they should take this opportunity to see how that workflow can be improved.

“Implementation of an IMS should prompt a thoughtful reevaluation and a potential restructuring of your processes, to align them with the system’s strengths,” he says.

“Any customisation should be aimed at enhancing what the IMS does, not overhauling it completely.”

A lack of training

Any IMS is only as good as the data it’s provided with – and if staff aren’t trained how to use it, this can result in garbage-in, garbage-out conditions very quickly, with nonsense outputs resulting from incorrect or incomplete inputs.

“These systems can be quite complex, and trying to find your way around a new platform can be tricky,” Simon warns. “Insufficient training for all staff using the inventory system can open the door to a cascading series of errors, creating problems such as discrepancies in stock descriptions and order statuses.”

For this reason, Simon advocates for IMS training to be a priority for all staff.

“When everyone understands how the system works and what it can do, then it becomes a real asset to your business, as opposed to a source of operational headaches,” he says.

Allocation errors

You can’t maintain healthy margins if you don’t know what your inventory is costing you. Despite this, one of the most common IMS mistakes Simon sees is the incorrect allocation of costs.

“We often see businesses fumble when it comes to things like allocating freight and import charges,” he says, “which leads to inaccurate stock value on hand. Inventory deposits are also often incorrectly allocated – this leads to errors in accounts payable and stock on hand value.”

To combat this, Simon suggests businesses implement rigorous checks of the data in their IMS.

“Regularly audit and cross-verify allocated values against actual expenses,” he says. “Getting this wrong can have a catastrophic impact on your financial statements, especially around crucial metrics like cost of goods sold and gross profit – so you need to keep an eye on your stock value now to avoid financial discrepancies down the line.”

Sub-par set-up

The purpose of moving away from manual spreadsheets and towards an automated IMS is to cut down on admin and streamline your processes. But for this to be the case, your set-up needs to be smooth.

In Simon’s experience, the most common IMS set-up errors include:

  • Sync errors caused by unmapped line items: This occurs when there is no account code in the IMS for a specific line item. The failure to sync results in discrepancies between IMS revenue and the accounting system.
  • Incorrect chart-of-accounts mapping: Even if you do maintain a consistent chart of accounts between the IMS and the accounting system, mapping errors may still occur – i.e. mapping shipping revenue in the IMS to a shipping cost of sale account in the accounting system. This results in understated revenue and cost of sales in the accounting system, impacting various metrics and KPIs.
  • Incorrect tax codes: Using the same tax code for all invoice lines – particularly in a Direct-to-Consumer Fast Moving Consumer Goods (D2C FMCG) business – can lead to complications, especially when a product is GST-free. The IMS might mistakenly treat all lines as GST-free, even when shipping should have GST applied. This can lead to the underreporting of GST obligations, and could require amendments to historical BAS lodgements, as well as exposing the business to ATO penalties.

Details matter, which is why Simon recommends regularly reviewing your IMS set-up.

“Check that invoices are hitting the right spots, and your chart-of-accounts and tax codes are mapped correctly in the system,” he says.

He also advises against the temptation of a do-it-yourself IMS setup.

“Partner with a qualified implementation consultant,” he suggests, “or task post-implementation checks to an ecommerce specialist accountant.”

Still having trouble getting your head around your IMS? You’re not alone. Reach out to us for a complimentary review of your accounting software stack, and for help with implementing an IMS that meets your needs.

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