Author: TRANQUIL

Inventory is one of the most critical assets of a business, and it needs to be managed efficiently.

Sufficient inventory is required on hand to meet production needs and fulfil customer orders.

Too little, and you may need to pause production or delay shipping; too much, and you run the risk of high storage cost of inventory as well as other potential risks like spoilage, theft, and so on.

All these factors need to be thoroughly thought about before deciding the quantity to store.

Before delving into what constitutes inventory storage costs, let us first understand why a company stores inventory.

Reasons for Holding Inventory

Striking the perfect balance between reducing expenses and carrying sufficient stock is easier said than done.

Most businesses fear that with inadequate stocks, they may miss out on sales and annoy customers.

ALSO READ: What is Landed Cost and How to Calculate It?

Here are the most common reasons that businesses hold inventory:

Safety Stock

Having just enough stock to fulfil the projected demand can be risky in the event of sudden demand spikes.

This encourages companies to keep some safety stock in hand, especially for popular items.

Seasonal Demand

Most retailers and some manufacturers have seasonal demand, earning most of their revenue in a few months of the year.

Air conditioners will sell more in the summer, while jackets and woollens will see a spike in demand close to winter.

To meet these seasonal demands, companies often stock up on inventory just before the start of the busy season.

Cycle Inventory

After forecasting sales, businesses often buy cycle inventory, which is simply inventory needed to meet the projected demand for different products.

Unlike safety stock, it is not purchased as a buffer to cover the unexpected but to cover the expected and forecasted sales.

ALSO READ: What is Zero Inventory? 

In-transit Inventory

This is stock bought by the company but not received at their warehouse yet.

Depending on the distance between the vendor and the company, the lead time can be a few months too, meaning that inventory could take a long time in transit.

But this stock needs to be accounted while they plan purchases for the near future.

Else, they may end up ordering too much.

Dead Inventory

Stock that can’t be sold is usually a write-off but continues to languish in some warehouses.

Unfortunately, it increases carrying costs without the management realizing it.

The storage cost of inventory can be so prohibitive that your inventory can become a liability for you – in spite of it being the most essential thing for a business.

Some experts stress on the need for minimal inventory to keep the inventory cost as low as possible.

Let us understand all about inventory carrying costs first.

ALSO READ: What is Dead Stock – How Can You Avoid It?

What is Inventory Carrying Cost?

This is an important KPI that allows you to establish if your operations are efficient or not.

If your carrying costs are very high, it could indicate that your business has excess inventory than what it needs.

You will need to rethink the quantities or the frequency of orders so that you don’t hold stock for too long.

There are four main categories of inventory holding costs – capital, service, risk, and storage expenses.

Risk includes theft, shrinkage, spoilage, obsolescence, and depreciation.

Capital costs refer to the amount you spend on purchasing inventory, interests, fees, etc; storage cost is lease, mortgage or rent for warehouses, utilities, labour, admin expenses.

Service costs refer to software, taxes, insurance, and so on.

We will now take a detailed look at what constitutes storage cost of inventory.

ALSO READ: Common Inventory Management Mistakes to Avoid

Inventory Storage Cost Components

Facility Cost

This expense is more or less fixed, and refers to the cost of the warehousing facility, depreciation on it and storage racks, insurance, wages of staff, electricity and other utility bills, etc.

It can be assigned only to the inventory that is inside the warehouse, and not to the individual inventory units.

Material Handling

Labour expenditure is a huge component of the amount spent on handling materials; labour is required for unloading, unpacking, storing in racks, labelling, picking, packing, loading, and so on.

Employee cost can be reduced by arranging the warehouses and storage of inventory items in such a way as to increase the productivity of employees and reduce the time they spend walking all over the warehouse to pick or put away items.

One way is to store the highest selling items closer to the packing station, or introducing some automation to supplement your human employees.

You can also try out different methods of picking, and implement software to map the best picking paths for your workers.

This will help increase efficiency and picking, and make it faster, as well as reduce your labour costs.

Material handling also includes the machinery and equipment used for handling the stock like forklifts, cranes, bins, and the like.

By storing fewer items in warehouses, a business can reduce its material handling cost considerably.

ALSO READ: What is Cross Docking?

Shrinkage

Some perishable items are liable to shrinkage in storage; this can be due to natural causes like evaporation, theft, transit damage, fraud, errors in records, and so on.

The higher the inventory that you hold, the more you are likely to lose to shrinkage.

To lower this cost, you could install CCTVs to find out if employees are stealing and dismiss them, ask vendors to be more careful with packing, and carry out physical counting.

ALSO READ: Why is Cycle Stock Important for Your Business?

Cost of Capital Funds

If a business borrows money to purchase stock, they are liable to pay interest on it.

This cost can be directly assigned to the inventory it is used to purchase.

Also, even a single unit of that inventory can free up funds to repay the debt as it gets sold.

This is a variable cost as the market interest rate often fluctuates.

However, tying up too much money in inventory can hamper your cash flow and probably even make it more urgent and expensive to raise more capital.

By investing smartly in forecasting software, you can purchase the right amount of inventory and probably bargain for more favourable prices and payment terms with vendors.

ALSO READ: How Can you Track UOM?

Insurance/Taxes

Most organizations purchase insurance policies to protect their inventory as it is subject to several risks as we saw above.

Once insured, even a devastating flood or fire will not cause you great loss; however, you must remember that your insurance premiums are linked to the quantity of inventory you store in the warehouse.

Therefore, the more the inventory, the higher your premiums.

The same goes for your taxes as well.

By storing a lesser quantity of inventory, you can reduce both your insurance premiums as well as taxes.

You could also plan things such that you sell the inventory you hold prior to the date when your inventory has to be checked to calculate your tax liability.

Administrative Costs

Several heads of expenditure can be categorized as administrative costs.

These include but are not limited to:

• Warehouse cleaning and maintenance
• Property tax
• Depreciation of equipment and building
• Transportation.

Companies with large warehouses and more inventory are likely to have higher admin costs.

ALSO READ: What is Backordering?

Risk Mitigation

Risk mitigation expenses include the cost of insurance, installing CCTVs, employing security guards, sprinkler systems, alarms, waterproofing, and other measures taken to protect the inventory.

This is also mostly a fixed cost, similar to the facility expenses, and relates to the inventory value.

Obsolescence

Certain types of inventories become unsaleable over time due to several reasons: they could be perishable as in the case of produce or food products, go out of fashion like clothing and footwear, or be made obsolete by newer, advanced models, as in the case of appliances and electronics.

This is generally an incremental expense and is usually linked to goods with low turnover, and to the inventory value.

Delayed Innovation

It could happen that a business is almost all the time concentrating on moving out the additional inventory it has.

This leaves very little time for the company to innovate and come out with new and more efficient product offerings for their customers. This can create a pretty negative image about the company in the minds of the customers.

As you can see, most of the inventory holding costs are of a fixed nature.

Therefore, a company with an empty or near-empty warehouse will have very little incremental expense if they have a couple of extra inventory units.

A business that has a full warehouse, however, is likely to have to deal with heavy expenses to store the excess inventory units.

The only way that this fixed expense can be reduced by a business is to ensure that they do not store huge quantities of inventory in their warehouses for long periods of time.

ALSO READ: What is Batch Tracking?

The Formula for Inventory Storage Cost

We have already seen that regularly measuring inventory storage costs can help you determine if you’re spending too much on storage and whether you need to change your production and purchase schedules.

To get the inventory storage cost, you first have to add all the expenses discussed above, for a whole year.

Next, you divide that cost by the total value of the inventory.

To get this as a percentage, you multiply the answer by 100.

Inventory storage cost = total storage cost / total value of inventory x 100

ALSO READ: Demand Forecasting and Its Importance

Why Is it Important to Calculate the Cost of Inventory Storage?

The storage cost of inventory can take up to 25% of the amount spent on inventory, which means it can impact the financial health of a company.

They can face serious cash flow issues if they are unable to measure the cost of carrying inventory; this can be resolved by implementing a robust inventory management system.

Another reason that you must calculate inventory holding costs is that you may have so much money invested in your inventory that you may have to forgo certain growth opportunities or lucrative investment opportunities.

And this may well happen without the management realizing that the storage cost of inventory is causing the problem!

ALSO READ: Tips For Efficient Stocktaking

Other reasons why knowing the inventory storage cost is important are:

Production Planning

When a business realizes the cost of storing inventory, the leaders can reconsider their production schedules.

Let’s suppose that the manufacturing time for product X is very short; the management can decide to stock a smaller quantity of this product.

If product Y is a hugely popular selling item, it makes more business sense to allocate more space in the warehouse for this product.

Profitability of Existing Inventory

When you calculate the cost of storing inventory and track the value of individual products, you can have a clearer understanding of how much profit you can make from the inventory in hand.

As holding cost is a huge part of inventory expense, you can easily measure item-wise profitability after deducting it.

ALSO READ: A Complete Guide to Cash Flow Analysis

Inventory Accounting

As inventory is a major expense for most companies, you must ensure that you calculate the storage cost of that inventory correctly, and also the value of the inventory items.

This information is necessary for the accounts department to generate financial statements accurately.

Decrease Inventory Cost with the Right Software

Investing in a robust inventory management software like Tranquil will provide you with innumerable options to optimize your inventory and reduce inventory carrying costs.

This smart investment will help you save a lot of money in the long run.

ALSO READ: Differences between Debit notes and Credit Notes

Book a demo with us to know more! See how Tranquil ERP and our Inventory Management Module can bring more efficiency into your business. Happy to answer any queries you may have.

 

 

Inventory is the most critical asset for a business, and managing it efficiently is essential for business success.

Today we will examine what a UOM is and how you can track it.

What is UOM in Inventory?

An inventory UOM or unit of measure is the standardized measurement unit used to count stock items and to express them as specific quantities.

Pieces, litres, kilograms, meters, etc. are some examples of UOM.

Units of measure help in quantifying and tracking items in your inventory.

The physical units help in measuring and managing the different items and help in planning their purchase to ensure fulfilling of customer orders.

Depending on the transactions, different units of measures are used for the same inventory item.

For example, you may purchase cotton fabric in kilos but may use them in production in meters.

ALSO READ: Important ERP Modules and Features

Types of UOM

Let’s take a look at the different types of inventory units of measure:

Stocking UOM

This is the unit of measure used in warehouses for quantifying inventory items.

Inventory transfers, picking, orders, container management, etc. are some of the warehousing transactions where stocking units of measure are used.

These UOMs help make warehouse operations simpler.

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Ordering UOM

As the name suggests, it is the unit used when placing orders for purchasing inventory items, and for sales orders as well.

Shipping UOM

This is the UOM used for shipping operations like unloading, loading, and packaging.

Standard UOM

Standard UOM means the measurement unit stays the same for ordering, stocking, and shipping.

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Importance of Unit of Measure

UOM helps in quantifying inventory items easily understood by all relevant parties, and hence is critically important in inventory management.

UOM makes it easy to understand how much a business is buying or selling, what price they have to pay, and so on.

Prices are always expressed in terms of UOMs; for example – SAR 500 per kilo, or USD 200 per box, and so on.

Without a well-defined unit of measure in the order and quotes, communicating the exact quantity becomes difficult, leading to confusion.

Units of measure must also be standardized so that all relevant parties have a clear understanding with regard to quantity and total price.

This is especially important in international transactions.

For example, some countries may use kilograms while others use pounds.

ALSO READ: Common Inventory Management Mistakes to Avoid

UOM Example

Let us suppose that a retailer has to order rice to stock in his supermarket, for sale to the end-users.

Here it is critical that the retailer defines the unit clearly.

Merely mentioning a number – let’s say 350, can cause misunderstanding.

The retailer may have kilos in mind, while the wholesaler could assume sacks – with each sack weighing 50 kilos!

Therefore, it is important that the retailer clearly mention the unit as kilograms while placing the order so that there is no ambiguity.

Factors to Remember When Creating Units of Measure Labels

Here are some tips that will help you to develop your UOMs.

• It is a good practice to keep all your abbreviations in lowercase; kg instead of KG for kilograms, pc rather than PC for ‘piece’.
• Make sure that whether its singular or plural you use the same UOM. For example, 1 kg and 100 kg (not kgs) or 1 kgs and 100 kgs. This way there will be no confusion.
• If individual pieces are counted, use only one from ‘each’ or ‘piece’ (ea or pc); using one UOM sometimes and another some other times will lead to chaos.
• The units in which you normally buy an inventory item should be designated as the default unit of measure.
• Make sure there is consistency in your UOM

ALSO READ: ERP in Accounting and Financial Management

The Importance of Tracking Multiple Units of Measurement

Certain items are easier to track than others; let’s take the example of shoes; you buy them as x number of pairs, stock them in pairs, and sell them in pairs.

However, not all products are like that; this is especially so if you buy raw materials in bulk, process them and sell them as finished products.

This would entail breaking down the product into different units of measurement.

Steel rods for example your company buys them say by weight.

But at your factory, they are cut into small pieces for sale.

So how do you account for them – by length or weight?

You may purchase an item like a soft drink in crates, but store and sell them as individual bottles.

Here it is important to know how many cola bottles are packed in a crate.

ALSO READ: What is Cross-Docking and How Does it Work?

Hence, we can see that we need to remember three categories of measurement units to track them:

• The unit in which you purchase or receive the inventory or Purchasing UOM
• The unit you use to track the item or Standard UOM
• The unit in which you sell the item or Sales UOM

It may not be necessary to have all these measurement units for each product; however, it’s a good idea to have a UOM that shows the way you track that item – the standard unit.

This will allow your employees to relate to the products in the manner they are familiar with, without any mix-up as the product is moved from purchase to sales.

You can also create your own units to be used internally for convenience.

For example, if you find it difficult to track an item in pieces, you could use dimensions.

For example – instead of just packing bags, you could refer to them as 12×16 bags and 14×18 bags (dimensions)

ALSO READ: Ways to Improve the Procurement Process

Tracking Inventory Items in More Than One UOM

It is possible to use the two UOM features; the primary unit is often used for purchasing, pricing, producing, receiving, packing, and shipping but the secondary is used for determining the pricing.

Say you need to purchase, order, or transfer an item in a UOM different from the pricing and invoicing UOM.
Here are a few examples:

• You receive rice by the sack but price them by the kilo
• You receive mangoes by the kilo but you price and sell in numbers
• You receive steel in sheets but price it per ton

The weight of each mango is different as they are of different sizes.

You may sell 10 different mangoes at a different prices as the weight for each is distinct.

Here you will use the primary unit piece while stocking the mangoes, and the secondary unit of grams when you price it.

An average crate of mangoes may weigh 10 kilograms; so, you use that unit for stocking.

The actual weight of each mango will determine the price of each mango – what you bill your customer.

You can use the dual UOM feature to track items in both the primary and secondary units of measurement at the same time.

This can be done throughout the procure to pay and order to cash processes, in various modules like Procurement, Inventory Management, Manufacturing, etc.

ALSO READ: How Does Landed Cost Affect the Cost of Inventory?

It is essential to record the correct weight of the item you buy or sell so that you can do accurate costing, pricing, and invoicing of that item.

Give an estimate of the price during purchase or sale, and ensure maximum value as per the precise weight that you have received or shipped.

In the case of perishables, the weight may reduce between the time of purchase and sale – evaporation causes weight loss while in storage.

Therefore, it is important to weigh the item just before it is shipped and price it as per this weight.

The Order Management feature allows the creation of a sales order in the primary UOM of the item, and uses the item or standard conversion to calculate the quantity in grams or any other secondary unit.

You can track an item in a unit different from the unit you’re using for stocking.

Say you stock and track the customer’s order in cases, but use kilos to track the quantity for pricing and shipping.

This means you can use both case and kilos to track that item.

Automated flows can be used for updating order lines, and invoicing them as per the primary or secondary quantity used for shipping.

In case you have to transfer goods internally, you can generate the transfer order and fulfil it in the primary unit, and calculate the pricing as per the secondary unit.

ALSO READ: What are Backorders and How to Manage or Avoid Them?

Benefits

These are the benefits of properly tracking items in different units of measurements:

• You can charge customers accurately, and as per the quantity you actually ship, that is, in the secondary unit of measurement.
• With accurate billing, you can boost your profits
• You can have more accurate reports by using the secondary UOM and quantity in them.
• Proper tracking of item UOMs will not only help you enhance revenues but to also deliver greater customer satisfaction.

Link your UOMs to Prices and Cost

By linking your UOMs to your prices and expenses, accounting becomes automatically easier, and your business also becomes more flexible, as you can sell products with different UOM.

The best practice would be to link your price and cost to the product’s smallest UOM, the one you use as the standard unit of measurement.

Therefore, in case you receive sunglasses in cartons, you must cost and price them per pair, and not cartons, if you’re selling them in pairs.

ALSO READ: Challenges in Procurement and Supply Chain

Using Software to Automatically Track UOMs

While spreadsheets are very useful to track inventory, they cannot be scaled; so, when you reach the point where there are numerous items to update, you are likely to make mistakes.

It makes good business sense to shift to robust inventory software like Tranquil Cloud ERP before you reach that stage.

Tranquil inventory management module allows you to tie a specific unit of measure to every item and use the appropriate unit for specific items.

This means that you are saved from the worry of remembering which unit to use at different stages like purchasing, shipping, and so on.

With Tranquil, you get the appropriate UOM in the correct context, with the right cost and price assigned.

Still, confused about how it works? Schedule a demo of our product when it’s convenient for you, and we’ll take it from there. Our executives will be happy to walk you through the software and answer any query you may have about its working.

 

Cash flow refers to how much cash and other liquid assets like shares a business spends and earns over a specific period of time.

The amount of cash on hand establishes how much flexibility a business has; the less cash you spend, the more space you have, and higher the valuation.

It’s different from profit in the sense that, unlike profit, it does not refer to the money that is remaining after subtracting your business expenditure from your total income.

ALSO READ: Benefits of ERP in Accounting and Financial Management

Understanding Cash Flow Analysis

In order to ascertain how liquid and solvent your business is, you need to track and study three types of cash flow:

• Cash flow from business operations
• Cash flow from financing activities
• Cash flow from investments

All of the above are included in the cash flow statement of an organization.

During a cash flow analysis, companies compare transactions in these three categories to check the revenue and expense sources.

This helps them to establish the status of the company currently.

Remember, however, that spending money is not always bad, and bringing revenues in may not always be good – it depends on the type of cash flow.

ALSO READ: What is Demand Forecasting? 

Remember:

• Analyzing cash flow aids in understanding the amount of cash earned or spent in a specific financial period by a business
• To maintain a viable business, it is critical to understand your sources of income and expenses
• Profitability does not mean you have positive cash flow, and negative cash flow does not mean the business is at the loss.
• Corollary measurements like unlevered or free cash flow can offer deeper and distinctive insights into the financial health of the business.

Explaining Cash Flow Analysis

We have already seen what cash flow is and how it’s measured from various activities in one cash flow statement.

Apart from measuring the profitability of your business via the P&L statement, this analysis provides vital information about its financial status.

This statement sets out the source of the money: sales, investors, loans, or anything else.

Similarly, it tells you about the cash outflows too.

A temporary negative cash flow is usually not a big problem but if it continues for a long time, most businesses would not be able to sustain it.

A newly established business is likely to spend more on marketing and growth-oriented activities and hence is likely to have negative cash flow.

As long as creditors and investors are ready to provide continued support, it won’t be a problem.

However, it is essential that the cash flow becomes positive to ensure the business stays viable.

It’s only when you review your cash flow statements properly that you can discover if there any problems or if there is a healthy cash flow.

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Additionally, you need to look into different cash flow versions like free cash flow which looks at expenses, not of a cash nature, interest payments, working capital changes, etc. which give you a better picture of your operational cash flows.

Your cash flow before considering your financial obligations is unlevered free cash flow, and levered free cash flow is about cash flow post those obligations.

Assessing and following the different cash flows could be very valuable when it comes to financial planning for future financial periods, and even in preparing for possible economic slumps or low sales.

Cash Flow Analysis Basics

First off you need to generate a cash flow statement about the three types of cash flows.

• Operating activities cash flow show cash received from sales, after deducting operating expenses including salaries, utilities, rent, and supplies.
• Investment activities cash flow shows funds spent in acquiring long-term investments like property and other fixed assets, and shares and other financial instruments.
• Financing activities cash flow shows your borrowings, lending, the money you put in, and so on.

ALSO READ: What is Inventory Cycle Counting?

Importance of Cash Flow Analysis

Now that we have understood what cash flow analysis is in detail, let us look at the importance of cash flow analysis.

A cash flow analysis establishes the working capital of a business.

This is the money that the business has for running everyday operations and completing transactions.

Working capital = current assets – current liabilities. Current assets are liquid assets like cash. Current liabilities are those that are due in the upcoming accounting period.

Analyzing cash flows enable you to see whether your business can pay its dues and earn enough revenue to continue operating for the long term.

When negative cash flows continue for too long, it could potentially mean bankruptcy; positive cash flows indicate good times in the near future.

ALSO READ: Benefits of Retail ERP in Business

Cash flow analysis is one of the best measures of the performance of a business due to these reasons:

It is Measurable and Comparable

Cash can be quantified, and it’s tangible and measurable in standardized units that are universally accepted.

Cash flow is very useful to compare two companies, even if they are in different industries and geo-locations.

It’s Tough to Falsify

Unscrupulous businesses often resort to profit inflation, to make it seem as if the business is doing better than it actually is; this is mainly done by artificial boosting of asset values.

The same is not possible with cash.

ALSO READ: Debit Note vs Credit Note

It is a Universally Accepted Tangible Store of Value

You may have to convince people about the value of goodwill, intellectual property, and so on, but not about the value of say SAR 2 million cash.

That everyone knows, and values.

The Benefits of Cash Flow Analysis

Short Term Planning

A cash flow statement is an important tool that can be used for planning in the short term, and to control cash.

Every business must have sufficient liquid assets that will allow them to meet the different financial obligations as and when they become due.

Cash flow statements enable the finance department to project the cash flow for the upcoming period, basing it on past cash inflows and outflows.

ALSO READ: Guide on Make to Order vs Make to Stock

Provides the Details of Expense Heads

Certain payments made by the company don’t show up in the profit and loss statement, but they reflect in cash flow statements.

The cash flow statement shows in detail where exactly the business spends its money.

We can understand this better with an example.

Let’s suppose a company has taken a loan and is paying the principal amount off; this will not turn up in the P&L statement, but it will be reflected in the cash flow statement.

Again, a situation where the company is profitable but lacks the liquidity to pay off its dues.

All such issues can be easily detected with the cash flow analysis.

ALSO READ: How to Calculate Job Cost?

Creates Additional Cash

The primary aim of any business is to be profitable, and it’s the profit that helps in creating cash.

However, there are other ways in which cash can be created in a business, and these can be identified by analyzing cash flows.

If you depend solely on profit and loss statements, creating additional cash can be very difficult.

For example, more efficient use of your inventory, collecting receivables quicker from your customers, and so on, can help you bring in excess cash – and this information is available in your cash flow statement.

Revealing the Cash Planning Results

Cash flow statements help companies evaluate the success of their cash planning by comparing the actual results with the projections laid out in the cash budget or statement.

These insights will help businesses take better decisions for the future.

Let us suppose that the company predicted an expense of SAR 5000 for acquiring a particular capital asset but the actual amount came to SAR 7500.

The difference between the projected and actual expenditure can be recognized and factored into the projection for the next financial period.

ALSO READ: Physical Stock Verification and Its Advantages

Long Term Planning

Cash flow analysis and prepared cash flow statements help businesses plan long-term cash requirements.

Business growth depends on the savvy long-term financial planning the company does.

The cash flow statement uncovers the crucial changes a company must make in its financial planning and allows the management to prioritize important activities.

For example, the cash flow projection can help management to determine the ability of the business to repay long-term debts as it depends on cash availability.

Knowing the Optimal Cash Balance

Cash flow statements also help businesses to determine the optimal cash balance level, which helps management to see if there is an excess or shortage of cash and if funds are lying idle.

These factors help businesses to take smart decisions around cash planning.

Let’s say the statement shows a cash surplus, and there are funds lying idle; this money can be invested.

On the other hand, if there’s a deficit, money can be borrowed in time to overcome the deficit.

ALSO READ: What are the Key Stages of Fixed Asset Life Cycle?

Helps in Working Capital Analysis

Working capital refers to the liquid assets like cash that the business has in hand to run its daily operations.

It is important for investors to be aware of the movement of the working capital of a business.

Cash flow can be increased by collecting receivables faster, settling payables later, and so on.

Performing The Cash Flow Analysis

The first step in performing a cash flow analysis is to get the three different cash flow statements ready.

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Generating the Cash Flow Statement

The most commonly included line items in the cash flow statement are:

• Proceeds of sales of goods and services
• Payments to employees
• Payments to vendors for supplies and inventory
• Rents, lease payments
• Payments of utility bills
• Interest on loans or any long-term debt
• Interest earned on deposits or loans provided
• Any fines or penalties paid
• Cash settlement received from lawsuits
• Payments made for repairs, maintenance, etc.

Two methods are commonly used in the calculation and preparation of the operational activities part of the statements: direct and indirect methods.

In the direct method, all the cash payments from operational activities are deducted from the total cash inflows from operations.

In the indirect method, the non-cash inflow and expenses are deducted from the net income.

Next comes the investment cash flow statement.

Here the end result is arrived at by deducting the amount spent on acquiring stocks and assets, and outstanding loans, from the amount earned through the selling of stock and assets, and loans repaid.

Lastly, financing cash flow refers to the cash that moves between a business and its creditors, investors, and owners.

ALSO READ: Why Distribution Management is Important?

The Five Steps Involved in Cash Flow Analysis

When performing the analysis, these are the trends to watch out for:

• Is the operating cash flow positive? This indicates that the company will be able to stay solvent and attain business growth in a sustainable manner.
• Negative operational cash flow with positive investment cash flow may mean that the business is selling assets to meet its operational costs – unsustainable in the long run.
• Negative cash flow is not always an indicator of trouble in investment cash flow as it usually indicates investment in equipment and property for expanding business. Combined with positive operational cash flows, it signifies that the business is in growth mode.
• Free cash flow is what the business has with it after paying operational and capital expenses, and can be used to pay principal and interest on loans, buy stock, and so on.
• Cash on hand from operations expressed as a percentage of income from sales in a specific period is the operational cash flow margin. Positive margins indicate profitability and efficiency and build trust among investors.

ALSO READ: What is Cloud Data Protection?

Analyze Cash Flow With Software

Calculating free cash flow and analyzing it can be complicated and daunting, especially for large organizations.

But with robust financial accounting software from Tranquil, you can rest easy.

All you need to do is configure your reports and, in a few minutes and with minimal effort, you can get details of cash flows, free cash flows, and more.

With an efficient ERP solution like Tranquil, you can automate all of these activities, and get AI-driven insights, enabling you to work with fewer employees. Do schedule a demo at your convenient time, and we’ll show you how Tranquil Cloud ERP can help your business meet its cash flow requirements efficiently.

 

Inventory is the most critical asset for a business; it is also vulnerable to theft, wastage, spoilage, and expiry.

A stock audit is conducted to ascertain the ownership, accuracy, rights and realizable value of the inventory of a business.

To maintain compliance with MIS reporting and to ensure an efficient book-keeping system, it is essential that your inventory is accounted for properly.

Inventory is not a static asset; it keeps moving.

Stock comes in, and moves out when customers place orders.

For this reason, the process of physical stock verification must be planned well, with the proper resources and expertise.

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In fact, this is among the most critical audits a business must conduct in order to establish the assets it owns.

Assets indicate the financial health of a company, along with their market position.

They can be used by an organization if a business fails, or if for any reason, they decide to dissolve the company; the company can sell these assets to pay off debts and clear all outstanding accounts payables.

Stock audit or physical stock verification means you need to count, calculate, weigh, and measure every item you have in stock.

This is about a stock audit or stock verification in a nutshell.

Let us now understand the objectives of physically verifying stock and other assets, its advantages, and methodologies in some detail.

ALSO READ: What is Inventory Cycle Counting?

What Are the Goals of Physically Verifying an Organization’s Assets?

• Organizations have to physically verify stock to adhere to compliance of a legal requirement
• It helps to establish that an organization has assets
• Physical verification of stock allows the organization to evaluate the stock and rectify any inconsistencies in books of account
• Enables the organization to maintain and supervise internal compliance requirements

Steps Involved in the Physical Verification of Stock

As physically verifying stock necessitates an objective evaluation of the contents of the ledger and all internal systems and processes that aid in asset management, the process of physical stock verification involves the following steps:

• A comparison and documentation of the tags of assets along with their product codes or numbers
• Manually verifying the model numbers of the products as given by the manufacturer, where applicable
• Physical counting of items in stock; some items may need to be weighed or measured as they may not be countable.
• Comparison of any additional information that is available, like department, location, and description by the auditors
• A robust attempt to deal with the possible matches per manufacturer, model, serial number, description, and so on, that could be recorded in other places.

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• Distribution of grouped assets and bulk entries to individual assets, like manufacturing equipment, fixtures, IT equipment, and so on.
• Auditors may visit the organizations again if necessary, for collecting more information and checking for residual assets.
• It also involves the setting up of an audit path to link the inventory file that is reconciled with the fixed assets as in the accounting books.

ALSO READ: What are the Key Stages of Fixed Asset Life Cycle?

Let us look at the most important steps in some detail:

Examining the Records

During the course of the physical verification, every record can be collected and noted on the basis of the basic commercial instruments available with the company with regard to the good.

This includes bin cards, investigation reports, goods received notes, material issued notes, and so on.

These facts shape the circumstances of individual cases.

It could so happen that those conducting the physical verification may find cases where organizations only have basic sales and purchase records, and don’t have any in-depth records of stocks.

In such cases, the verifying personnel may need to extend the scope of applying the audit procedures.

Attendance at Stock Taking

The whole process of stock verification is based upon the method of physical verification the organization follows – periodic or perpetual.

Whether an auditor has to be physically present for the process is up to their discretion.

If they are convinced of the efficiency and transparency of the internal controls and procedures of the business, they may not be actually present; they will, however, ensure that their instructions are followed by those conducting the stock verification.

ALSO READ: Tips For Efficient Stocktaking

Confirmation from Third Parties

This step is necessary if third parties hold a good portion of the company’s stocks.

The physical verification needs to ensure that these third parties are trustworthy, and the auditor must get it in writing that these parties hold the stock as per the quantities and description in the company’s books.

Benefits of Physical Stock Verification & Reconciliation Services

Let us see some of the advantages of stock verification:

• Physical stock verification supports the stock valuation as seen in the balance sheet through actual counting
• Helps to verify the correctness of stock records of a business
• It aids in detecting possible fraudulent activity, depreciation, loss, or pilferage
• It identifies and offers a way to remedy the vulnerabilities if any in the system

Every business must conduct a thorough physical verification of stock at least once in a financial year, usually at the end.

It is usually a reconciliation of stock assets line-by-line as in the books of account, with the assets that are physically counted during the inventory-taking process.

ALSO READ:  What is Batch Tracking?

Methods of Stock Verification

Let us now take a look at the different physical stock verification methods.

There are three methods that are commonly followed by businesses across industries all over the world:

1. Continuous or Perpetual Verification

In this method, stock verification is carried out in the course of the year, rather than confine it to a specific time.

Businesses that follow this method usually have a proper system and program in place to ensure that it is performed smoothly.

Here, the physical evaluation of every inventory item happens at a minimum, once in the course of a year.

The continuous or perpetual verification method offers a few specific advantages over the other two methods:

• It causes minimal business disruption or hinderance, and daily transactions and postings can be continued as usual.
• Neither employees nor the particular store in question have to pause their routine activities
• Shortage or excess inventory that arises now and then can be properly evaluated during this verification and written off.
• Continuous verification ensures that all physical stock verification happens in a timely fashion.

ALSO READ: What is Negative Inventory and How Can you Prevent it?

2. Periodic Verification

This is the method that is the most commonly used, especially by small or new businesses.

Under this method, all the stock is verified and processed altogether in one period – the end of the financial year.

This makes sense for small organizations or those not yet established as they have fewer assets in comparison to large companies.

They can pause operations for a day or two and do physical stock verification.

This method is not suitable for large organizations as it could mean having to pause business operations for several days.

3. Blind Verification

This is not a very commonly followed procedure.

Here those verifying the stock give only the location, without details of stock record balance, description, quantity, etc.

The individual conducting the verification only mentions the same figures as recorded in the account books, without actually conducting physical verification of the stock and giving their opinion on it.

As you can see, it really does not serve the purpose of physical verification of stock.

ALSO READ: What is Product Bundling? 

Understanding a Few Basic Facts About Physical Stock Verification

A Stock-Taking Sheet And A Stock Valuation Sheet

As the name suggests, a stock-taking sheet records all the items that are in the inventory which have been purchased for a particular time period, and includes details like the quantity, supplier name, per unit price, and so on.

On the other hand, a stock valuation sheet is a summary of the results from the various stock-taking sheets and calculates the grand total of every item in stock.

ALSO READ: What is Dead Stock – How Can You Avoid It?

The Need for Materials Verification

It is important for companies to formulate a system to check and validate stock regularly, as per the regulatory requirements and local conditions.

Let us take an example of a company that receives materials as a monthly consignment.

The company will need to physically count and ascertain that all the items have been delivered to the company at least by the last day of each month.

In case this is not verified in a timely manner, goods that get delivered after that date won’t be counted in the physical count of materials in hand.

ALSO READ: Why is Cycle Stock Important for Your Business?

It is not only mandatory compliance but good accounting sense to take a physical count of the stock in your organization regularly.

This can be done quarterly or even monthly.

The physical count of goods must be verified against the quantity that is recorded in the ledger and other books of accounts.

You should also conduct an intensive review to check the currently held stock against the valuation performed in the previous year to ascertain if there are any discrepancies.

Who Should Ideally Carry Out Stock Verification?

Physical verification of stock should be conducted by an employee of the Audit or Accounting team.

They can review all the books of account and make a comparison with the number as revealed by the physical count.

In the absence of an audit department, the company can assign an employee from the Purchase or Operations department to carry out physical verification of inventory.

ALSO READ: Benefits of Stock Status 

Things you Need To Check While Carrying Out Physical Verification

Ideally, the whole end-to-end process of counting inventory must happen in a clean and bright environment, without any contaminants like dust, insects, toxins, as well as elements.

Every item must be checked individually.

The physical count (or measurement) needs to match the data from instruments like delivery dockets, invoices, packing slips, and so on.

Final Thoughts

While physical verification is a manual process, it has to be verified against the quantities, descriptions, and values as recorded in your books of account.

There could be errors in the accounts books if maintained manually, and the process could also take a long time.

Tranquil cloud ERP’s robust Finance module has rich accounting features that make it super easy to maintain your ledger and other books of accounts. You can have precise accounts of everything including your inventory. This makes it easier and simpler to reconcile the physical stock counts and is more accurate to boot. Schedule a demo with us to know how our software can help you manage your inventory better and maintain compliance with accounting and other regulatory requirements.

Debit notes and credit notes are accounting documents used by businesses, with different purposes and recipients.

They are not the same as invoices; these documents are used to let customers or buyers of goods know how much money they owe to the supplier, or how much credit they still have, and to let sellers know how much they are owed by customers.

They are essential documents that help in tracking outstanding payments and shipping.

A debit note and credit note are usually issued at the time of goods being returned by customers to sellers or suppliers of the said goods.

The seller of the products gets a debit note while the buyer of those products gets a credit note.

The vendor or seller also gets the goods back, along with the debit note which states that their account is debited with the amount.

The seller then issues a credit note to the customer stating that their account is credited with the amount (of the value of the goods returned) mentioned.

ALSO READ: What are the Benefits of e-invoicing for your Business?

However, it is not only at the time of the return of goods by a customer to the seller that debit and credit notes get issued.

Sometimes sellers may inadvertently overcharge customers or make a mistake in calculation.

Or it could also happen that the seller may inadvertently forget to calculate the discount promised during negotiations.

At such times too, the buyer issues a debit note to the seller of the products, informing them that their account will be debited with the amount mentioned in the note.

This amount will be the difference between the amount billed by the seller and the actual amount.

In other words, by whatever amount the customer was overcharged.

The seller then issues a credit note to the customer or buyer, informing them that their account is credited with that amount.

Some businesses follow the practice of issuing debit notes to customers when they sell them goods, to inform them the amount owed to them.

This is normally done before an invoice is sent.

Similarly, a business may issue a credit note to their supplier, informing them that their account is being credited with a specific amount.

However, it must be noted that this last reason is not practiced much today, and so for the purpose of the article, we will focus on the first two.

Before we start to examine the difference between credit note and debit note, let us first look at each of them in detail.

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What is the Definition of a Debit Note?

A debit note is a commercial instrument that is created and issued to the seller by the buyer.

This document contains details like a short description of the goods in question, the amount to be debited to the seller’s account, and the reason for debiting the amount.

It informs the seller that a debit is being made in the buyer’s book to their account.

The motives for doing so could be any of the following:

• A debit note is issued to the seller if there is overcharging of the buyer’s account
• When the customer or buyer returns products purchased from the seller, they issue a debit note
• It is also issued when the seller’s account is undercharged by the customer.

The debit note decreases the accounts receivables for that particular customer or buyer in the seller’s books.

To acknowledge the receipt of the debit note, the seller generates and delivers a credit note to the customer.

ALSO READ: What is Demand Planning and Why It is Important?

Debit Note Format

A debit note format is as follows:

• Name and address of the issuer
• Debit note number
• Invoice Date and Due date
• Issued to name and address
• Goods details like item name and number, quantity, unit price, the total price
• Grand total
• Tax if any
• Bank details

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What is the Definition of a Credit Note?

A credit note is a commercial instrument that is created and issued to the purchaser of goods by the seller.

This document contains details like a brief description of goods, the amount being credited to the customer’s account in the seller’s book, and the reason for the credit.

It is usually issued when the seller receives a debit note from the buyer.

In some cases, the seller may be the first to issue the credit note.

These are the causes for which a credit note is issued:

• A credit note is issued when the seller’s account is overcharged by the buyer
• A credit note can also be issued when the seller gets back goods sold by them to the buyer
• In case the seller has undercharged the customer, then the customer can also issue a credit note to the buyer.

The credit note decreases the account payables for that specific vendor or supplier in the purchaser’s books of accounts.

Usually, it displays a negative amount.

ALSO READ: How Does Landed Cost Affect the Cost of Inventory?

Credit Note Format

A credit note format is as follows:

• Name and address of issuing company
• Credit note number
• Credit note date and due date
• Name and address of the entity to whom the credit note is being issued
• Details of goods like item name, product code, the quantity of each, per unit price, and total price
• Grand total
• Tax if any
• Bank particulars

Let us now compare Debit Note vs Credit Note:

The journal entry passed when a debit note is issued:

Sales Return Account – Dr
To Debtor’s Account – Cr.

The journal entry passed when a credit note is issued:

Creditors’ Account – Dr.
To Goods Returned Account – Cr.

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A debit note is issued to the seller of goods by the purchaser while returning goods purchased while a credit note is issued to the purchaser of goods or the customer by the seller of goods.

A debit note reflects a positive amount while a credit note reflects a negative amount.

A debit note is issued when the customer or buyer of the goods returns them to the vendor or supplier of those goods.

But a credit note is issued when the vendor or supplier of the goods gets products back from the customer to whom they were sold.

A debit note reduces the account receivables, and a credit note reduces the account payables.

When a debit note is received by the seller, they update their sales returns books and the buyer updates their goods return book; when a credit note is received by the buyer, they update their purchase returns books and the seller updates their sales returns the book.

A debit note is a different form of the return of products purchased, while a credit note is a different form of the return of products sold.

Debit notes are only issued when credit purchases are made, and credit notes are only issued when credit sales are made.

ALSO READ: Guide on Mandatory electronic invoicing in Saudi Arabia

What are the Benefits of Credit Notes?

These commercial instruments offer several benefits to businesses, like:

1. Helps in Avoiding Reporting Errors

Credit notes help businesses keep a record of errors in calculation or omission in all the operational business processes.

This will help in rectifying mistakes that have already occurred and take precautions to not repeat them.

2. Build a Good Relationship with Clients

When a business issues credit notes, they work as a guarantee to customers while carrying out transactions or entering into contracts.

While it’s true that it creates a temporary minor financial loss, being transparent and honest about your mistakes will go a long way in building trust and forging strong bonds with customers.

And this is crucial if you want your business to flourish and thrive in the long run.

ALSO READ: Difference Between Procurement And Purchasing

3. Improve Business Operational Performance

When you evaluate your mistakes, you can take the necessary steps to enhance operational efficiency.

As credit notes help you record and track accounting errors, they help you to assess and improve operational performance.

4. Businesses Avoid the Possibility of Conflict

Conflicts in business can occur quite frequently if there are no proper methods of detecting invoicing errors and reconciliation.

When credit notes are issued, the possibility of misunderstandings comes down significantly – in fact, there won’t be any scope for misunderstanding as you admit to your customer that an error has occurred.

5. Orderly Administration

Issuing credit notes is an indication of your business being orderly and organized, and in accordance with accounting systems.

ALSO READ: A Comparison of Sales Orders and Purchase Orders

How Will you Generate and Issue Debit and Credit Notes?

Of course, the conventional way was to do it manually, on paper.

With the advent of computers, people started typing them out on document editing software or spreadsheets, or even saving templates.

But none of these methods are free from errors.

Today we have accounting software that is capable of generating and issuing debit and credit notes.

You simply have to enter the details of goods and to whom you are issuing the instrument, and the software will calculate the correct amount, even accounting for tax.

This helps you maintain compliance with accounting regulations, as well as be on good terms with your customer.

ALSO READ: What are Backorders?

Tranquil cloud ERP is a robust, comprehensive, and flexible ERP solution with a feature-rich Finance Module. It helps you streamline all your financial and accounting operations, and be accurate in all transactions with vendors and customers, as well as to maintain compliance with accounting laws. If you’re unsure how Tranquil can help your business, do book a free demo with us at a time of your convenience, and we will be happy to walk you through our software. Our executives will be happy to answer any queries you may have.

 

Any business serious about growth would want to implement smart strategies for marketing and sales to stay competitive in the market.

There are several ways they can try, but the most efficient and quickest method would be to use a robust ERP system.

Sales include everything from communicating with the customer to tracking dispatched orders for individual customers.

These are often time-consuming and monotonous activities and can be easily automated and managed well using an efficient ERP.

The sales management module in your ERP enables you to maintain extensive and accurate records of all your sales transactions.

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The sales management ERP software allows you to update total sales and distribution functions efficiently.

It handles many roles: placing orders, generating new items, scheduling, and altering existing items, sending estimates and quotes to customers, copying, shipping, and so on.

The sales and distribution management also handles the job of creating sales opportunities, and efficient use of distribution channels to turn a profit.

Organizations use ERP to plan the way they want their business to achieve growth.

They can see where they need to make improvements, and how to do better in the future.

Thanks to automation, you can avoid manual data entry and save time with ERP; moreover, it initiates deliveries in a timely manner.

In a scenario of intense and ever-increasing competition, companies need to concentrate on improving sales procedures and increasing leads and conversions.

What Are the Main Activities in Sales and Marketing?

The sales and marketing modules offer functionalities to handle every phase, right from prospecting, to tracking customer orders, placing orders for dispatch, raising invoices, and accepting customer payments.

Here are the core functionalities in the Sales and Marketing module in an ERP:

• Sales order
• Scheduling orders
• Shipping
• Tracking invoices
• Sales returns

ALSO READ: What is Demand Forecasting? 

Further, the below-mentioned functions can be recorded as well:

• Automation of employee activities like customer visits and expense tracking
• Setting marketing targets for employees
• Activities related to employees collaborating with franchisees and business partners.
• Customer payments after dispatch of goods
• Contacting customers to follow up on invoices and receiving payments
• Tracking lost orders and reasons for losing them
• Preparing thorough reports of sales and marketing activities like sales trends across different periods, analysing the data to make sales forecasts, etc.

Core Features in an ERP Sales Module

Customers and sales are at the heart of not just a business, but also ERP systems.

They connect orders – which puts demands on a business – with cash flows – which is what keeps a business going.

Now every business has its own sales requirements, yet there are some crucial features that should be there in the sales module of an ERP.

1. Customer Database

This is the entity you do business with – whether an individual or business.

The ERP allows you to group customers within the system in any manner that is relevant for your business – by product, location, etc. advanced features include prospecting tools, sales funnel, and linked customers, that are otherwise found in a CRM.

2. Multi-tiered Orders

A single customer may place an order for several different products. For example, let’s say a company makes baby products like toys, pacifiers, booties, clothes, cloth nappies, etc.

A retailer may place orders for differing quantities of different products, like 100 boxes of nappies, 40 boxes of pacifiers, and 500 boxes of clothes.

When the sales team takes orders, the order form has separate columns for product description, amount, quantity, and so on.

These can be broken down, with lines having different quantities and delivery dates, or even a specific date as requested by the customer for the delivery.

Perhaps the customer wants the boxes of pacifiers to be delivered earlier than the other products as they are urgently needed at his store.

When configured properly, ERP supports this arrangement effectively.

For example, the specific date requested by the customer can be defined in the system as a shipped or delivered date, with the difference being the transit time.

ALSO READ: Key Steps for Successful Demand Planning 

3. Quotes

Quotes in the ERP Sales module are pretty much like an order, without an agreement to deliver yet. They are also valid for a certain period – usually, the last date of validity is mentioned.

The ERP system will let you convert the quote into order once you’ve struck a deal after negotiations.

4. Sales Forecast

This is simply the expected demand for products, or in other words, sales, in the near future.

ERP software uses numerous statistical methods to predict future sales by using historical sales data, seasonal trends, current market conditions, and other factors.

Sales forecasts help businesses plan production properly, and order the necessary raw materials, and so on to meet future demands.

5. Credit Limit

Most businesses set credit limits for their customers.

This way, the ERP software will trigger an alert if orders for a particular customer are taken exceeding the credit limit.

Now this customer will only be able to place orders after making payment for previous orders.

This safeguards your business interests and ensures you don’t end up with several unpaid sales.

ALSO READ: Sales Order vs Purchase Order 

6. Backlog

A reliable ERP system must offer a database that can be queried on every open order, arranged by their delivery-due dates.

Orders to be delivered next month are likely to be in the process of either production or procurement, while those say 6 months away are not likely to have any action planned for the present.

It is also desirable that the production and quality control modules are integrated, as this renders decision-making that much easier.

7. Sales Territories

While not absolutely essential, this is a desirable feature.

ERP software can break down sales by executives categorized by regions.

This way, a particular executive will be responsible for all sales-related activities in that region, like bookings, orders, backlogs, tracking deliveries, etc.

ALSO READ: What is Backordering? How to Manage or Avoid it?

8. Sales Returns

Customers may want to return their purchases for a number of reasons like defects in the product, quality issues, duplicate orders placed by mistake, and so on.

Without a proper system to record and track returns, it may lead to data duplication, errors, and confusion.

A robust ERP sales module should have a proper system to account for sales returns.

Benefits of Using ERP for Sales Management

Let’s take a look at the benefits of sales management in a nutshell:

• Integrating business processes
• Improved decision making
• Unified reporting system
• Customer management
• Real-time information
• Forecasting
• Easy implementation
• Saves money
• Unified reports dashboard
• Efficient management of inventory

ALSO READ: Understanding the Role of ERP in Supply Chain Management

How Does ERP Help in Sales and Distribution?

• Obviously, the most important goal of the sales and distribution activity is increasing productivity and profitability. With the right ERP software, you will be able to respond appropriately to customers, improve response time, and achieve your sales goals quickly and efficiently.
• By allowing the sales team to view all the essential information in a central location, the ERP helps in the management, monitoring, and tracking of every stage in the sales process.
• Scheduling customer appointments, following up, evaluating competitors, and other activities are automated by ERP, and this helps to boost performance and productivity overall.

ALSO READ: Guide on How Do ERP Systems Work

• An efficient sales module facilitates improved collaboration among sales teams, enabling them to work together for better productivity and optimal results.
• An effective sales management module can help businesses enhance their sales processes, maintain and update records of orders, invoices, agreements, and other documents, manage accounts, and so on. This affords businesses comprehensive visibility into the process from start to finish, identifying opportunities for cross-selling and upselling, regulating expenses, and craft more efficient and customer-centric business strategies. Basically, it helps companies to have a tighter control in the sales department.
• It centralizes data in a unified dashboard and provides accurate data in real-time that helps in making informed decisions.

ALSO READ: What is CPQ? Guide on Configure, Price, Quote

• Accurate data and analytics help in predicting future demand for products, ensuring you don’t lose opportunities for sale.
• By boosting efficiency in the sales and distribution process, you can empower the sales team to stay competitive as a business.
• The solution can be smoothly integrated with other functions like marketing, inventory, HR, payroll, finance, production, etc.

The software helps in the planning, scheduling, regulation, and observation of contacts.

By sending alerts regarding current activities and opportunities in one place, it helps enhance performance and improve time management.

This helps to avoid hurdles during sales activities before they become problematic.

Your ERP sales management module maintains historical and current records of all transactions with customers including goods and services delivered to them.

This signifies the importance of sales management module for businesses.

ALSO READ: What is Inventory Cycle Counting and What are its Benefits?

The Benefits to Sales Function

Though manufacturing can benefit instantly from including sales in the overarching equation, it also benefits the sales function immensely.

The ERP solutions of today are capable of performing the same functions that standalone sales software used to do, and even go beyond it.

It not only allows easy access to the sales data, but it also tracks the sales process from end to end.

This can lead to quicker lead times, fewer manufacturing problems, better productivity, and enhanced efficiencies overall.

This in turn can help improve conversions and customer retention.

ALSO READ: An Overview of Assemble to Order Process

Detailed records of communication with prospects and customers, transaction information like sales history, terms of payment, special requests for delivery, etc. can be easily maintained.

With ERP, you can also manage the sales cycle more efficiently, and provide improved customer service including after-sales service.

This will help you to decrease costs associated with marketing and sales.

By integrating all the functions into one organization-wide system and making data centrally accessible, you can facilitate improved decision-making for your business.

Siloed information can lead to redundant data and confusion.

But with a centralized system, everyone is on the same page.

An efficient ERP system with a feature-rich sales module can benefit your company tremendously. By automating monotonous activities and streamlining the entire sales process, you can stay ahead of the competition.

ALSO READ: What is Zero Inventory and Why it is Important?

Tranquil Cloud ERP is a robust, cloud-based ERP that can help boost overall efficiency and productivity by transforming your sales process. We can show you how exactly our software can help your business – all you have to do is book a demo with us at your convenient time. Our executives will take you through the solution and answer any query you have.

 

Distribution management is a business challenge that needs to be effectively tackled to ensure proper growth.

Raw materials being delivered earlier than required and getting damaged, or finished products arriving too late to fulfil consumer demand – both are potentially disastrous for business.

To manage distribution successfully, you have to have a robust strategy backed by real-time data and efficiently handle the different elements involved.

ALSO READ: Important ERP Modules and Functions

What Is Distribution Management?

Distribution management refers to the process of supervising the movement of raw materials or finished products from the vendor to the manufacturer, from there to the wholesaler, then to the retailer, and finally, to the end-user.

Several processes and activities like managing the raw materials supplier, warehousing, logistics, supply chain, packaging, inventory, etc.

It is a critical element of the business cycle, especially for wholesale dealers and distributors.

For any business, the speed at which they can turn their goods over determines their profitability.

The importance of distribution management can be understood from the fact that if implemented properly, it can help businesses stay competitive and deliver customer satisfaction.

Understanding Distribution Management

The ability of a business to attract customers and be profitable depends significantly on how well they manage distribution.

To be successful in this activity, it is imperative that the whole distribution process is managed with precision.

This is especially true of larger corporations with numerous suppliers.

Effective management of distribution in such cases can only be achieved when they automate processes through the implementation of distribution management software.

ALSO READ: Guide on How Do ERP Systems Work 

Distribution management today is not merely about moving your products from one point to another.

You need to collect and share important information that will help in the identification of growth opportunities in the market and help you stay competitive.

Tech-savvy companies use distribution forces to gather market intelligence which allows them to evaluate their competitiveness.

There are two types of distribution management: sales or commercial distribution, and logistics or physical distribution.

Numerous functions are involved in distribution, including but not limited to – inventory management, customer service, warehouse planning, receiving, handling, and managing materials, information sharing, and more.

The goal of distribution management is to attain the most efficient delivery of raw materials, finished products, and work-in-progress (partially finished goods) to the correct place and in time, in the right condition.

The planning of physical distribution must be aligned with the overarching channel strategy.

ALSO READ: Understanding Different ERP Systems

Who/What Is a Distributor?

An individual or business that engages in the supply of products in bulk to retailers or other businesses who sell to the end-usersare called distributors.

Let’s see a few examples:

• A distributor of rice supplies to restaurants, grocery stores, and supermarkets.
• A distributor of shirts supplies to departmental stores, and retailers
• A distributor of health drinks and energy bars supplies to gyms, health clubs, supermarkets, and pharmacies.

What Is a Distribution Network and What Are the Benefits?

A connected group of transportation systems and storage services is referred to as a distribution system.

It is developed in line with a distribution strategy created to ensure the movement of goods from a manufacturer through various agents, till it reaches the ultimate buyer.

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Distribution vs. Logistics

While both distribution and logistics deal with efficient movement and delivery of goods, there is a major difference.

Distribution management is only a part of the larger logistics management activity.

Logistics deals with the precise planning and various activities that aim to supply and transport goods effectively.

Bulk shipping and management, supply management, fleet management, delivery routing, security, temperature controls, warehouse, tracking shipments, etc. are the various activities involved in logistics or physical distribution.

On the other hand, distribution management is a system within logistics that is focused on fulfilling orders through distribution channels.

The channels mean the agents and other entities that a product goes through from its point of origin till it reaches the end-user.

Independent or third-party distributors, retailers, wholesalers, and e-commerce sites are some examples of distribution channels.

Commercial or consumer packaging, fulfilling orders, and shipping them are processes involved in distribution.

The importance of distribution in supply chain management is due to the fact that it deals with getting goods to the end-user or buyer in time, and with minimal waste.

This means that it directly impacts your profits.

ALSO READ: Benefits Of ERP Software For Logistics Industry

What Are the Elements of Distribution Management?

This is simply referring to the steps involved in sending the product from the manufacturer through various entities to the eventual consumer.

Typically, this includes:

• Logistics
• Supply chain
• Purchase order and invoicing system
• CRM
• Vendor management
• Warehouse management system
• Transportation management

Advantages of Distribution Management

We have read in the previous paragraphs that distribution management offers numerous benefits to businesses when effectively implemented.

These include waste reduction, lower costs, and increased customer satisfaction.

Let us examine the benefits in detail:

1. Increased Customer Convenience

When you implement a sophisticated management system, you make it simple and convenient for your customers to shop.

Without an efficient system, customers would not get most of what they wanted in a single store, and would have to go to multiple stores – and this would be very bothersome indeed.

ALSO READ: Must-Have HRMS Modules and Features

2. Better Organization

Without a proper supply chain and distribution management system, retail stores may get products in bulk directly from the manufacturers, and it will be almost impossible for them to store that much quantity.

3. Lower Costs

By streamlining all your processes, you stand to save a great deal of money as you won’t have to shell out extra money for urgent deliveries.

With a proper system in place, you will have whatever you need in time.

4. Fewer Errors

With a robust distribution management system in place, you can significantly reduce delivery errors.

You will also be able to get more clarity on the products that have to be delivered.

With a proper distribution management system, the chain of supply is much smoother.

ALSO READ: Benefits Of Software As A Service

5. Accuracy

When you have an advanced distribution management system, you can order exactly how much quantity of an item you need for a specific period.

This helps to ensure that you don’t miss any sales opportunities and are able to offer your customers their favorite products.

6. Simpler Inventory Monitoring

Monitoring and managing your inventory becomes a breeze with the right distribution management system as everything is properly accounted for.

Every inventory item that is delivered and shipped out is accounted for, giving you an exact inventory count.

ALSO READ: What is Inventory Cycle Counting?

Challenges in Distribution Management

There can be multiple disruptions in distribution management, caused by various factors.

• War, protests, strikes, and riots are human factors.
• Epidemics, natural disasters like floods, shortage of raw material, and pest damage are natural causes.
• Vehicle breakdown, delayed flights, restrictive transport regulations, maintenance downtime, etc. are transportation challenges.
• Sudden fluctuation in customer or market demands, recession, payment issues, changes in values of currency exchange, change in fees, licenses, and so on are economic challenges.
• Quality control issues, packaging problems, and product recalls are product disruptions.
• Product returns, change in the shipping address, and order changes are customer disruptions.

Factors That Influence Distribution Management

Buying Habits

You must consider the purchase habits of customers as the rises and dips in sales influence distribution patterns.

Tracking them can help you plan appropriately.

Unit Perishability

Time is crucial when you are dealing with perishable products like medicines and food products.

Even the slightest delay in timing can cause your stock to get damaged and unsellable, leading to financial loss.

ALSO READ: Demand Forecasting and Its Importance

Buyer Requirements

A manufacturer’s or retailer’s demand is subject to change and can impact your distribution.

Transport Optimization

You must make the most of every delivery; this means ensuring that your trucks are loaded to their maximum capacity and that they are on the most efficient routes for delivery.

Seasonal Forecasting

Certain products sell better at specific times of the year; for example, air-conditioners are likely to sell more before summer sets in.

You need to consider what product mix will be optimal.

ALSO READ: What is Zero Inventory and Why it is Important?

Distribution Management Strategies

There are three main strategies of distribution management:

• Exclusive: This strategy targets a very limited group. Let’s take the example of high-end luxury cars. Only a handful of retailers will keep these cars in their showrooms
• Selective: This strategy targets distribution to a select group of sellers. For example, premium cosmetics are sold only to premium department stores, salons, and pharmacies.
• Mass: This kind of distribution targets the mass market – to general consumers everywhere.

What Are the Channels of Distribution?

Wholesaler

Most goods are shipped by manufacturers to wholesalers; as we read previously, pharmaceutical companies distribute medicines to pharma wholesalers.

Retailer

Products are sent from the wholesaler, and sometimes the manufacturers, to the retailers.

For example, clothes are distributed to clothing chains and departmental stores.

Distributor

This entity transports products from the manufacturer to an authorized distributor.

Let’s take the example of a Toyota factory that distributes Toyota cars of different models to authorized Toyota dealerships.

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Ecommerce

This is the latest distribution channel, where products and services are displayed online in virtual stores, and shipped (distributed) directly to the buyer.

The emergence of this channel has brought in sea changes, leading distributors to innovate and shift from conventional strategies and methods.

Key Takeaways

Let us quickly recap the importance of distribution management:

• It helps in supply chain management – from vendors to manufacturers to the end consumer, and includes inventory, logistics, warehousing, and packaging
• Implementing a proper distribution management system is critical for a company’s business growth and long-term existence
• Everything can be easily organized with robust distribution management
• When done properly, distribution management helps minimize errors, reduce cost, and save time.
• Effective distribution management helps improve customer service and ensure customer satisfaction.

ALSO READ: Why is Cycle Stock Important for Your Business?

Choosing a Distribution Management System

It is vital that you select the appropriate distribution management system for your organization.

Of course, this depends to a great extent on the goals and challenges of your company, and the channels and models of distribution it uses.

However, there are a few common factors to bear in mind:

• The system should be compatible with legacy systems and be easily integrated
• It should be flexible and scalable
• It should provide good security
• Preferably cloud-based
• The system should provide real-time streaming of data, data management, and analytics, and make it easy to share data
• Agility and adaptability, to make it capable of accommodating the quick changes required to resolve challenges and take advantage of new opportunities.

Tranquil ERP is a robust system that ticks all the above boxes. Do schedule a demo with us, and we will show you how it can benefit your business. We are happy to answer all your queries.

 

Inventory is the lifeblood of any business, and managing it properly is critical to smooth operations and business growth.

There are various methods to manage inventory efficiently.

An efficient ERP system with a robust inventory management module is a tool that most businesses rely on today.

We hear a lot of terms in connection with inventory – stock taking, overstocking, reorder levels, cycle counting, understocking, and so on.

Today, we are going to discuss cycle counting.

Many business owners and managers seem to have confusion regarding cycle counting, especially vis-à-vis stocktaking.

Let’s understand exactly what cycle counting is and is not, to eliminate this confusion.

What is a Cycle Count?

Conventionally, a stock-taking or inventory audit meant counting all the stock in a company, on a specific date.

This was usually at the end of the financial year, but depending on the inventory control policy of the organization, it could also be quarterly or monthly.

Every single stock of what a business uses, whether to manufacture or sell, needs to be counted.

This includes raw materials, spare parts, consumables, work in progress, and finished goods.

It goes without saying that this is a humungous task; but as this material is highly valuable, it is essential that it is carried out with precision.

ALSO READ: What is Negative Inventory and How Can you Prevent it?

Inventory cycle counting is a method that is used to count the inventory, but it varies from the conventional method.

Cycle counting involves counting a specific part of the total inventory regularly throughout the year.

This gives a much more precise count of the stock.

You can think of it as a method of checks and balances used by companies to verify that their inventory records and physical counts match.

When the cycle count is performed regularly, over time, the business would have counted all the goods they have.

With efficient inventory management strategies, you can eliminate or minimize transaction errors and have accurate records of your stock.

Regardless of the type of method followed by a company for inventory tracking, regular cycle counting is necessary.

In fact, it’s an essential auditing process that helps in managing inventory counts.

The company management decides the inventory management practices which are acceptable for their stock, depending on their specific situation in the company’s stock control policy.

Criteria like how frequently the high-value items should be counted, acceptable loss, and so on.

ALSO READ: Why is Cycle Stock Important for Your Business?

What are the Benefits of Cycle Counts?

Conventional stocktaking gives rise to several problems for the business; the main one being disruption of business for the duration of the stocktaking.

All operations that involve inventory are paused; this is done to ensure the speed and accuracy of the stocktaking.

Usually, the factory or branch where the stocktaking happens is shut down until the completion of the activity.

However, with cycle counts, it is not necessary to shut down operations.

Let us examine in detail, the benefits of cycle counting in inventory management:

1. Eliminates Process Disruptions

As cycle counts concentrate on specific stock ranges, they can be performed parallelly with normal operations, eliminating disruptions or keeping them to a minimum.

Cycle counting is a streamlined inventory management method, allowing the receipt, consumption, and dispatching of stock to take place as usual, without having to freeze operations.

When operations are frozen, you suffer a loss of business, which means revenue loss.

This can be avoided with cycle counting, especially when it is integrated into your system as a weekly or monthly routine.

Assessing inventory counts on an ongoing basis also helps in getting all the team members on the same page.

ALSO READ: Top Benefits of Stock Status

2. Quicker Remedial Actions

Thanks to the increased frequency of counting the same inventory items, cycle counting helps to identify areas of inventory management problems quickly.

This enables management to take appropriate corrective action to resolve them.

Cycle counts can be used to track and verify relevant controls.

3. Helps in Stocking, Production, and Distribution Decisions

Cycle counting can help to take better stocking, manufacturing, and distribution decisions.

Any business tries to cut costs, and a huge portion of capital is invested in inventory.

Most businesses feel that having more stock in the warehouse is key to better customer service – always being able to fulfil customer orders, and ensuring no sale is lost – however, overstocking has negative impacts on cash flows.

This can be pretty disastrous for a business.

4. Precise, Quick, and Frequent Decision-Making

With accurate stock counts, you can take better and more accurate decisions, and be able to forecast better.

You can also minimize over or under-stocking, along with redundancy write-offs.

ALSO READ: What is Stock Adjustment and Stock Transfer? 

5. Decrease Errors

As there is a lot of spare time between counts in the cycle counting method, there is sufficient time to resolve errors that could have occurred during operations.

Identifying errors is a breeze using the cycle counting method as compared to the conventional annual counting method.

It also increases the accuracy of the count, as you count smaller quantities.

As there isn’t a long gap between counts, you automatically reduce the time an error could continue in your operations.

In conventional inventory counting, in case of discrepancies, you would not discover it for months – which would eventually cost you money, and lead to dissatisfied customers.

With cycle counts helping you catch errors quickly, you can run your business operations more effectively, and know just when to place purchase orders.

6. Reduce Staff Disruptions

Cycle counts don’t impact staff availability for critical operations, unlike annual stock takes.

Additionally, they don’t cause delays in fulfilment processes either.

7. Save Resources and Time

Manual counting of your entire stock takes time and effort, and eventually, money.

Cycle counting helps eliminate all of this, and also causes fewer errors.

ALSO READ: What is Cross Docking? 

8. Enhanced Customer Service

The insights you gain from cycle counting eventually benefit your customers. How?

You are able to manage your inventory more efficiently, and have complete visibility into your stock – where it lies, what the proportion of each stock item is in relation to other items, and so on.

This will help you focus on your lead times so that you can plan your production to be complete in time to fulfil orders.

9. Increases “Stock Turns”

Stock turn is also referred to as inventory turnover rate; it just means the speed at which the stock is sold and replaced.

High inventory turnover or stock turns lead to reduce carrying costs, as inventory doesn’t stay in your warehouse for long.

ALSO READ: How ERP Can Improve Business Efficiency?

Implementing the Cycle Counting Method

Implementing cycle counts helps companies to view the accuracy of their inventory counts as an important part of the entire business operations.

It helps them to make better purchase decisions for your company.

The most important reason for using cycle counting is to get an exact count of your warehouse inventory.

The count is unlikely to be accurate with manual methods, as counting smaller bundles of inventory is much easier and increases accuracy too.

This helps to deliver better customer service as well.

Additionally, it can help you increase profitability as well.

These factors need to be considered before you actually commence implementation of cycle counting in your business:

• It must be included in the regular business routines – daily or weekly; unless you do that, the method will not achieve its intended purpose. Sporadic counting will only get you sporadic results. Remember, it is absolutely imperative that cycle count is done regularly.
• Maintaining a schedule for the counting process is essential. Create a schedule that is aligned with your business operations, as each business is different. However, we recommend a cycle of 13 weeks schedule. Here every inventory item you have will be counted in a cycle of 13 weeks.

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• Most importantly, create a plan before you actually implement the actual process. It is very important that you prepare well; only then will you be able to generate the results you desire. Ensure that the inventory items are properly arranged in your warehouse and that there is a precise plan in place for the proper counting of your inventory.

How Do Cycle Counts Work?

Cycle counting is subject to several variables, as discussed below:

• Team capacity – you should be able to deploy a few employees or hire them, to perform cycle counts of our inventory to ensure accuracy. After all, your stock is valuable, and you don’t want to write it off.
• Count scope – define the quantity of inventory in your warehouse to be counted per day, week, or month, and how this will impact your operations.
• Frequency – the count will be more accurate for high-value, high-turnover inventory items; it will also uncover any mismanagement happening with it.
• Location – ideally, inventory items that are heavy or bulky, and those that are high-selling, should be placed closer to the doors. This, however, also puts them at a higher risk, necessitating an exact count of those stocks.

ALSO READ: Why ERP User Interfaces are Important?

Types of Cycle Counting

There are different types of cycle counting, and each business has to choose the one that suits its operations the best.

Here are some suggestions:

Control Group Cycle Counting

A small group of items is counted a number of times across minuscule timespans.

In the long run, repetitive counting helps discover errors if any in the counting.

Once the errors are rectified, the process can be implemented over several areas to additional product categories.

Random Sample Method

In this type of cycle counting, random inventory items are selected periodically; it’s mostly used in warehouses that store massive quantities of similar items.

This method also helps to check for and identify discrepancies.

ALSO READ: The Ultimate Guide to Dropshipping

ABC Inventory Analysis

This method is very popular, and it ranks SKUs according to the volume of annual sales at cost price.

This is a laborious method necessitating a lot of preparation, as each item is assigned alphabet A, B, or C.

‘A’ refers to the quick-selling and high-value items, which are also counted more often, with ‘C’ which is a redundant stock that’s counted just annually.

Other

There are also hybrid approaches that combine two or more of the above methods.

Some companies use map-based cycle counts which are arrived at by dividing the stock quantity by the surface area required to stock it.

As mentioned earlier, each business needs to develop its own suitable approach for stock control depending on its unique requirements.

ALSO READ: Benefits of Integrating E-Commerce and ERP

Are Cycle Counts Fool Proof?

While there is no risk involved in cycle counting, it may not be a good idea to rely overly on this one method while ignoring other judicious processes of inventory control.

Cycle counts alone, of course, are not capable of providing comprehensive, 360-degree visibility into your inventory.

They are just snapshots, which do not take into account matters like seasonal demands.

However, if you plan carefully and specify exact items and locations, you can reduce these potential risks greatly.

How can ERP use Cycle Count Data?

Robust ERP software like Tranquil can help you with:

• Consolidation of the comprehensive stock situation for the company
• Planning cycle counts, regardless of methods
• Evaluate and help in the analysis of counts to identify chinks in your inventory control
• Automated cycle counts using auto-identification software, and defining cycle count parameters in criteria, which can be uploaded to the ERP system for best results

Cycle counting can streamline inventory management and help in cost saving.

To know how Tranquil cloud ERP can help improve your inventory management, do schedule a demo, and we can walk you through the software.

 

Implementing an ERP is a time-consuming and disruptive venture, but it affords companies the means to redefine their strategic goals and improve their business processes.

When you successfully implement an ERP system like Tranquil, it can spur innovation, improvement, enhanced collaboration, and overall efficiency in your organization.

Centralizing data rather than maintaining it in silos brings all the decision-makers on the same page.

When a company has unflinching support from the management, excellent change management programs in place, exemplary due diligence, and so on, its ERP implementation is likely to be smooth and successful.

The ERP solution is often deployed in several phases – it begins with discovery, moving on to business requirement documentation, planning, and deploying the software.

Tech support is also provided post-implementation.

When the KPIs for ERP implementation commencement are good, the chances of the deployment being well aligned with the business goals are higher.

It will also enable the company to derive greater value from the new system.

ALSO READ: How Does Landed Cost Affect the Cost of Inventory?

Important ERP Implementation KPIs to Know

As companies extract value from their ERP software for several years, it is essential to track long-term KPIs in addition to the short-term ones.

Only then will you be able to ascertain how close your business is to achieve its strategic goals.

Once the software is deployed, tracking the following KPI ERP can help you get a definitive picture of its success along with areas that you need to fine-tune your ERP strategy.

1. Downtime

This may come as a surprise, but believe us, it’s an important one – in fact, one of the most important.

One of the reasons you opt to implement ERP is to reduce or eliminate downtime.

Hence, it is sensible to keep an eye on how well the ERP is achieving this goal.

Make a record of the frequency of the downtime and how long it lasts, along with the causes for the same.

This will help you recognize the recurrent problems, allowing you to resolve them and improve performance in the future.

This is one area where you need the numbers to stay down.

ALSO READ: Guide on ERP Configuration vs ERP Customization

2. Adherence to Schedule

This refers to how well your ERP helps you in maintaining the production schedule you want to have.

It is again a critical KPI; after all, timely completion of projects and increased productivity is one important goal of ERP implementation.

A robust ERP solution will ensure that the gap between the scheduled production and actual production is as low as can be.

If that is not the case, it means that something is going askew, and it needs to be fixed.

3. Inventory Turnover

This important KPI ERP system measures the quantity of inventory sold in a specific time period.

ERP helps automate processes and offers improved visibility, which should ideally increase the inventory turnover.

Let’s say you find that the inventory of a specific product is always in excess; in that case, your ERP will be able to assess what quantity of that product you need to stock in the future.

Based on the purchase behaviour of consumers, the ERP can forecast the sales for the near future in just seconds.

While this can be done manually, it would take a very long time.

When you divide your sales by your average inventory, you get the inventory turnover ratio.

ALSO READ: Common Inventory Management Problems and Solutions

Let us suppose that you have defined a target of selling 20,000 pairs of socks each week.

When you implement your ERP successfully, it will track the sales closely and offer visibility into your inventory process as well as ways to sell more products.

The inventory management module helps you to avoid overstocking and tying up money, as well as understocking and not being able to fulfil customer orders.

You can maintain optimal inventory to ensure efficiency, continuous production, and/or sale, at an economical cost.

4. Project Margins

Tracking project margins will let you verify whether the ERP is giving your business the benefits you want.

This is especially true for construction and other project-based industries.

Project margins measure what a business earns after reducing the expenses incurred for labour, materials, and overheads.

A robust ERP can decrease labour costs, automate processes, ensure optimal resource usage, and simplify your budgeting, thereby helping you increase your project margins.

Materials, labour, expenses, invoices, budgets, bookings, estimates, milestones, and completions are some of the KPIs you should be targeting.

Robust ERP systems like Tranquil collate data on all these KPIs so that you get a comprehensive view of cost and revenue per project.

ALSO READ: What is P2P (Procure to Pay) Process?

5. Real-time Data

Unfortunately, the majority of businesses have no access to precise, real-time data; implementing ERP helps them to achieve cross-organizational data consistency, and gain insights that make proactive decision-making possible.

Different ERP systems have varying levels of BI capabilities, but most systems have pretty sophisticated BI functions.

They can show you when your manufacturing equipment will need to be serviced – to give you a small example.

This will help you reduce downtime as well as to set pragmatic expectations for consumers.

Another KPI could be how much you can reduce machine downtime.

6. Demand Forecasting

Demand forecast metrics define the reliability of the forecasts made by the business regarding demand in the near future for its products and services.

A robust ERP solution offers near-perfect accuracy in forecasts, helping businesses predict demand for specific products.

It considers factors like seasonal trends, market conditions, imminent calamities (weather-related), and historical sales data to make these forecasts.

ALSO READ:  Key Steps for Successful Demand Planning

7. Increased Purchasing Power

One of the ERP KPIs you can track is how much you could lower material costs by having better negotiating power.

An effective ERP helps to lower costs and maximize requisite business purchases, thereby improving your purchase power.

This can be achieved by leveraging the vendor performance management feature to point out weak points and bargain for more favourable terms with suppliers.

You can also identify the expensive vendors and look for more economical ones.

Your vendor list can also be aggregated, streamlining your purchasing and making it more efficient.

ALSO READ: What are Backorders and How to Manage or Avoid Them?

8. Scheduling

Scheduling metrics can help you track the speed of production against schedules to ensure that you meet the important milestones.

For example, for a company manufacturing soft toys or exotic bath items, a milestone could be manufacturing and delivering 3 times the usual quantity of their best sellers in time for the Valentine’s Day shopping.

A software development company could have a schedule to launch their newest bug fix within x number of days.

Thanks to ERP, you can now schedule these milestones easily; it offers clarity into the way manufacturing processes are tracking in comparison with deadlines, along with insights into potential interruptions, helping you to take proactive corrective action.

9. Employee Satisfaction

Employee satisfaction cannot be quantified precisely, unlike sales or inventory turnover.

But it can be measured through the success of ERP implementation.

If the employees are happy, you will find productivity and retention is up, which translates into increased sales – and attrition is down.

This is a good sign for the financial health of your company. If this is not the case and employees are unhappy, this will also be reflected with productivity and sales showing a downward trend. You will be able to take the necessary corrective action.

ALSO READ: Ways to Improve the Procurement Process

10. Business Productivity

Business productivity is measured to check business performance everywhere in the world.

Business goals can remain unattained if departments and teams in a company don’t use their working hours productively.

Supply chain problems, equipment failure, low employee output, and process inadequacies are the most common hurdles to business productivity.

However, these factors can be tracked easily by an ERP and evaluated comprehensively.

This will help you to assess everything that affects your productivity, and make the right decisions to improve those factors.

Let’s say that a certain product has high demand but the shipping is getting delayed simply because there’s a shortage of packing staff – the manager can see this in the system.

The manager can resolve this problem by hiring additional staff.

11. Customer Experience

Being able to deliver enhanced customer service is one of the main reasons that companies want to implement ERP systems.

Customer experience is one KPI that you should never ignore to measure.

When your business resources are optimally allocated and your processes streamlined, the business functions related to customer service are automatically improved; in fact, anything you improve in your processes eventually aims at improving customer service.

E-commerce business owners know that ERP helps them to manage important information like customer orders and shipping.

You deliver improved customer service when you process and ship orders on or before time.

ALSO READ: Benefits of E-commerce and ERP Integration

To provide good customer service, you also have to be consistent; you must deliver familiar and positive experiences continuously, to make sure that they return to you.

Delivering orders late or delivering wrong products, and mishandling of the situation can cause customers to leave you.

Unlike employee experience, this is a measurable metric.

You can ask customers for reviews on your social media pages and your website; you can easily check the number of new customers and returning customers as well.

ERP systems can also help with making improvements that can help you delight customers like multiple options, more flexibility, quicker than promised deliveries, and so on.

12. Business Processes and Timelines

You need to check whether your processes are able to align with your business goals better and if you are able to stick to your timelines.

The purpose of implementing ERP is process streamlining after all.

ALSO READ: Guide on Make to Order vs Make to Stock

13. IT spending

In today’s tech-savvy world, spending on IT is essential; but are you spending too much?

By tracking IT spending KPIs you can ensure deriving maximum benefit from your tech investment at the lowest cost.

You can reduce costs of hardware, maintenance, hosting, and subscription by implementing the right ERP.

If you are still continuing with legacy systems, you may end up paying huge money for maintenance as you’re likely to need specialized resources for it.

But if you deploy a modern ERP like Tranquil, you will get all the metrics easily and not have to bother about upgrades and customization.

This information will help you reduce costs without compromising on performance.

ALSO READ: What is Dropshipping and it’s Benefits? 

14. Sales and Revenue Growth

You should be able to see a growth in your revenues once you deploy an effective ERP, thanks to higher sales and lower expenses.

Expenditure is reduced thanks to business processes being streamlined, and higher operational efficiency in your organization.

With real-time data access, you can make informed decisions to improve sales.

To put it simply, revenue and sales KPIs show you how much you have made from selling your goods and services over a particular time period, as well as how that trend is likely to be over a longer period – say a year.

Average order value, operating margin, and average profit per product are the most commonly measured KPIs.

These metrics will help you see the best opportunities for growth, along with areas where cost-cutting can be done by improving efficiency.

These two types of insights can help boost sales and profitability.

ALSO READ: Common ERP Challenges in 2022

How Do you Measure ERP Success?

Defining key metrics is critical when you implement new ERP software.

A well-defined business strategy, a blueprint of the expected benefits of ERP implementation, and a brief of your current performance – this is a good places to start.

Eventually, you must understand that each company is different, and we cannot have definitive pointers for the implementation success.

It is therefore important that you outline what success means for your business.

We can help you successfully implement ERP software that will deliver numerous benefits for your business. Schedule a demo with us to find out how! Our executives will explain the system and answer your queries.