How to Manage the Hidden Costs of Your Inventory

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The cost of goods sold consists of the direct production costs of an item. The labor, material, factory overhead and supplies needed to make a product go into this calculation. However, the CoGS does not provide the complete picture of your inventory expenses. Indirect expenses such as your packaging, customer service staff and warehouse security get overlooked by this figure. You need to track the hidden costs to determine how much you’re actually paying for your products.

Common Hidden Costs

The exact expenses associated with your inventory vary based on your industry and the products you offer. Here are the hidden costs you need to take note of when you’re calculating your cost of goods sold:

  • Landed costs: Everything associated with moving your goods between locations.
  • Packaging: You reinforce your brand with product packaging, but the costs can add up fast.
  • Administrative overhead: How much do you spend on customer service, onboarding and other support options?
  • Shortage costs: You have direct and indirect expenses when your products go out of stock. You pay more to speed up your shipments, look into emergency inventory sources and deal with higher prices than you’d normally pay for products. The indirect costs occur when your customers get frustrated with your company for not having an expected item on the shelf.
  • Carrying costs: Do you know how much it costs your business to store your products, have money tied up in unsold items and pay for warehouse security?

How Hidden Costs Impact the Bottom Line of Your Business

Your bottom line won’t match up to your expectations if you overlook the many hidden costs attached to the price of your inventory. Your pricing strategy may fail to give you sufficient profit margins, and you end up with a poor ROI. Don’t put yourself in a position where you stand to lose money with each sale!

How to Manage Hidden Costs

Track every possible cost associated with your inventory. You need visibility into this data to understand where you can reduce your costs. For example, address high carrying costs by switching to a different warehouse or adjusting your storage locations based on geographic demand. Does it look like your shipping pricing is through the roof? Reach out to the business to renegotiate your contract or go rate shopping. Incremental changes will have a beneficial effect on your bottom line.

How to Improve Cash Flow

Optimizing all of your inventory costs gives you a boost to your cash flow, but you may need to make more extensive changes. Order items with unusually high demand at the current time to get back on track with positive cash flow. The demand might not last over the long-term, but you can take advantage of the revenue boost to put your company in a better position.
Figuring out your hidden costs is easier said than done. You need a system in place that’s capable of showing you all aspects of your business from a single dashboard. A modern inventory and order management solution, such as TradeGecko, helps you manage your inventory and business processes better. TradeGecko Intelligence provides Reorder Reports that list low in stock products and Location Reports, which shows you the stock levels in multiple locations. These tools help you reduce shortage and landed costs respectively.
You have the relevant data right in front of you in one application. You don’t have to work with your inventory by hand, going row by row on a cumbersome spreadsheet. Integrations with popular accounting software like Xero and Quickbooks gives you access to the real-time expenses, so you don’t get taken by surprise from sudden changes. You can even predict trends to take a proactive approach to ordering, such as choosing the top clothing colors for the season.
Don’t let hidden costs drag your bottom line down. Use these techniques to find out your real inventory expenses.
Contributed by TradeGecko, which provides Inventory and Order Management Software to small and medium sized businesses. They offer a free trial. Connect TradeGecko to your sales channels to automate inventory management in the cloud instantly!

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