Cost containment and control are an integral part of all business operations. Out-of-control costs can be the death of any company large or small. To the home based woodworking business, this is extremely important because there probably isn’t a large pot of money to draw from and controlling costs is one of the best ways to add directly to the bottom line.
One of the major components of containing cost is inventory control. Taking the time to manage your inventory will lead to higher profits and better cash flow for your woodworking business.
First let’s define inventory. inventory is a stock of physical goods that have economic value, and are held by the company awaiting processing. It can take the form of finished goods, work in process and raw materials.
Inventory is a necessary function to carry out business and companies hold inventory for a number of different reasons.
First and foremost in a woodworking business inventory is held for functional purposes, an accumulation of all the materials required for production of a product. In a woodworking business this would include the different types of wood and hardware required to complete a woodworking project. The trick is to carry enough inventory to keep operations going but not so much that it affects cash flow. Inventory can be held for speculative purposes also. For example lets say your supplier is running a special on Cherry wood and the price is just fantastic. You aren’t building any woodworking projects out of cherry right now, but you know, you will be in the future, so you by the cherry now and put it in inventory for future use. Remember though that there are carrying cost for holding raw material in stock, you don’t make any money on inventory until its sold.
Your woodworking business will always have completed inventory in stock, chairs and tables and birdhouses to mention just a few.After a while you will be able to tell which inventory items are moving better than others which is called inventory turnover which is the number of products sold over a specific period of time. Armed with this information, you can determine which woodworking projects you should boost production of and which ones should be curtailed or cut out completely.
A physical inventory of all raw materials and completed projects should be done no less than once a month. This information will tell you if it’s time to order more raw materials and which material should be ordered.It also alerts you to inventory items that are starting to build up,an indication that something might be wrong. For example, a product that was being built with this material was no longer selling as well as before, so you cut back on making the finished product.you can either sell the excess inventory or, you might run a sale on the finished product bringing inventory back down to acceptable limits.
Inventory management is critical to your success be