Common Inventory Management Mistakes Costing You Profits

 

Common Inventory Management Mistakes Costing You Profits

For new founders and small business owners, inventory is usually the single largest cost — which means every mistake carries real financial risk. 

When you’re just starting out, you don’t always know what the reception to your products will be, and you have no idea how long lead times are to get your inventory from overseas suppliers. When we first started Mango Puzzles, one aspect of inventory that caught us by surprise was just how long everything takes. Even getting a simple sample from our suppliers in China took over a month. 

Inventory issues can be silent killers for early business. Mismanaging stock — from wasted spend to missed sales — can alter the trajectory of your business because there are often no quick fixes. 

Let’s go over the eight most common inventory mistakes early-stage founders and small business operators make and their solutions. I’ll also share some of the hiccups we experienced in our business so you can avoid the same mistakes.

 

Common inventory mistakes to avoid

 

Mistake 1: Ordering emotionally without clear forecast models

In the beginning, you do have to rely on your gut to a degree. There may not be any prior history to build your forecast model on. As a result, you may order stock based on how you feel about certain products. 

Here’s the thing: Gut feelings will only take you so far. You’ve got to gather data to help your decision making. Conduct product polls on social media, run ads with different product creatives, or gather feedback from early customers. Use these data points to help build a forecast model you can rely on. 

At Mango Puzzles, we experimented with Reddit ads for three different puzzles to determine how much inventory to order of each.

Mistake 2: Not using an inventory tracking system

One of the biggest inventory management mistakes is to go without a tracking system because it means you are essentially flying blind without a good grasp on the business. 

An inventory tracking system is essential for knowing your stock levels in real-time, but it can also influence decisions around promotions to increase average order value. 

For example, at Mango Puzzles, our tracking system showed we had some puzzles that weren’t moving as quickly as we’d like them to. So, we created a promotional bundle that included the slow-moving puzzles, which helped get them out the door.

Mistake 3: Forgetting to follow inventory KPIs

Not paying attention to key performance indicators is a common mistake in inventory management for new founders and small business owners. It’s vital to keep up with:

• Real-time stock levels: What you have available to sell right now
• Inventory turnover ratio: How many times inventory sells through in a specific period
• Sell-through rate: How products perform
• SKU-level stockout rate: Products that hit zero stock in a specific period
• Backorder rate: The percentage of orders you can’t fulfill because of missing stock
• Days inventory outstanding: How many days your products sit before selling
• Supplier lead time: How long it takes to get stock

In the beginning, we didn’t have a great understanding of our stock at Mango Puzzles. We quickly learned from that mistake because when you’re out of stock, you’re actively losing revenue.

Mistake 4: Not understanding lead times

In our first year, we didn’t get a shipment of one of our leading puzzles until December 24th. I don’t have to tell you that puzzles are a seasonal product for you to understand how big of a mistake that was. 

Founders and small businesses must understand how their long lead times are when it comes to receiving stock from your suppliers. I recommend optimizing lead times by strategically choosing your suppliers. Often, the closer the supplier, the shorter the lead time.

Mistake 5: Overstocking because of supplier deals or fear

Suppliers will sometimes provide discounts on larger orders and you will be tempted to pull the trigger because of the savings. You may even place a larger-than-necessary order because you’re afraid you’ll run out of a best-selling product. 

To avoid these common inventory management mistakes, I urge you to look back at Mistake 1 and consider the importance of using data to build forecast models.

And before you submit any purchase orders, develop an overstocking strategy so you know what to do with excess stock if that ends up being the case. For example, will you be able to bundle excess stock with heavy-hitters to move them faster or will you use them as part of a gifting promotion? 

Keep in mind that the longer you hold on to a product, the more expensive it becomes because you’re paying to store it.

Mistake 6: Ignoring shipping and fulfillment costs

When we received our first large business-to-business order at Mango Puzzles, we focused on the per-unit cost without really considering the shipping costs. Of course, those pesky shipping costs ate into our profit margins. 

Always do your due diligence when it comes to shipping and fulfillment expenses because they can impact your bottom line. While you may be thrilled to see the order come in, it’s important to breathe, take a step back, and do the math first.

Mistake 7: Underestimating the seasonality of the business

Not all e-commerce businesses are seasonal, but if you’re in an area that is heavily influenced by the time of year like puzzles, you’re going to want to pay special attention. 

To effectively prepare for your peak season, you will have to work six to nine months in advance depending on where your suppliers are located and how long lead times are. For example, our busiest months are November and December. We are putting in our orders in June to receive stock by September or October at the very latest. 

Don’t underestimate the seasonality of your business because it can make or break your year.

Mistake 8: Not timing cash flow strategically

One of the most common inventory mistakes is managing cash flow ineffectively. 

Inventory is typically the single biggest cash expense for product-based businesses. Keep in mind that inventory doesn’t become cash until you sell it. As a result, you may have a timing gap between paying your suppliers for the inventory and then getting paid by customers for the products. 

 

Don’t fall into the trap of making common inventory mistakes

 

Good inventory practices are essential, whether you’re fulfilling orders out of your garage or you have a full-fledged shipping and receiving team at the warehouse. If you’re trying to prevent stockouts and overstocking, reduce cash flow issues, and build operational resilience, you’ve got to treat inventory management as a strategy rather than a gut feeling. 

Make decisions based on data whenever possible — and collect and monitor inventory data from the beginning. Don’t underestimate how long it takes to receive inventory, remember that shipping costs can eat into your margins, and keep the seasonality of your business top of mind. Focus on timing your cash flow just right so you can keep inventory flowing. 

In the beginning, inventory management is going to feel like a guessing game. It did for us at Mango Puzzles, too. Over time, though, you’re going to sharpen that sword, optimize your inventory strategies, and get better with every order.

Common Inventory Management Mistakes Costing You Profits