Inventory management isn’t just about being diligent and meticulous—the sheer amount of industry know-how that goes into proper, effective inventory management can be staggering, especially for newer startups.
This is where an experienced Chief Financial Officer (CFO) can be invaluable. To explore the nuances of inventory management and the pivotal role of a CFO, we sat down with Matt Turner, a CFO who knows the inventory management space inside and out.
Turner’s eclectic career began in the heart of Silicon Valley during the dot-com boom and bust. After transitioning to a law firm, he moved to New York City, where he worked in ad tech and SaaS before joining a large startup, Fab.com.
It was here that Turner had the opportunity to build an inventory tracking system from the ground up, a career-defining experience that informs his current role at Propeller Industries, where he leads the Los Angeles office, focusing on inventory management for CPG companies.
Inventory Management Systems Aren’t For The Faint Of Heart
Inventory management systems are as much about people and processes as they are about software and tools. Many startups make the mistake of believing that simply implementing a system will solve their problems.
“The sad reality is an inventory management system is more work than NOT using an inventory management system,” Matt explains.
In other words, an inventory management system is just a tool—and it’s only as effective as the people using it. While a modern inventory management solution can provide significant out-of-the-box insights and allow you to track performance, getting the most out of such a system is significantly more labor-intensive than manually managing inventory.
That’s because these systems require rigorous inputs and demand consistent updates, making shortcuts nearly impossible. “[Unlike spreadsheets], as soon as you implement an inventory management system to track and manage your inventory, you lose the ability to cut corners,” Matt says. “So everything has to be put in correctly.”
With inventory management, you basically can’t make mistakes. Backdating can be extremely difficult (it’s often best to enter inputs in real time). Likewise, writing off shrinkage is a massive challenge.
“If you don’t do it right, it’s worse than if you never did it at all,” Matt explains. If the inventory management process is led by inexperienced personnel, it can lead to ‘ripple effect’ mistakes that are long-lasting and difficult to rectify.
The cardinal sin many startups make is viewing inventory management as an afterthought—something to be handled at the end of the week or month. This approach is always going to be risky.
By treating inventory management as a secondary concern, businesses are forced to untangle a web of discrepancies at month’s end, making it harder to identify and fix issues. More mature companies manage inventory on a daily basis with multiple checks in place to ensure accuracy.
When Should Startups Use Inventory Management Systems?
The short answer is that it depends on how complicated your product is. For direct-to-consumer (D2C) companies with a few SKUs and simple finished goods, you can delay inventory management (at least temporarily).
However, as the supply chain becomes more complex—introducing variables like weights, shrinkage, and production intricacies—the need for a robust inventory management system becomes paramount.
Consider, for example, a startup that produces bottled beverages. The caps, bottles, and other components must all be meticulously tracked because even minor losses can add up. Without strong inventory management, these items might wind up unaccounted for, leading to discrepancies in cost calculations and financial statements.
Common Inventory Management Mistakes Startups Make
Many startups underestimate the true cost of their products. The more complex the product, the more often this is the case.
“True cost is always higher than you think,” Matt says. Shrinkage, packaging, and raw materials might raise your costs, but it can be difficult to account for these increases properly.
Often, additional costs are dismissed as timing differences—a mistake that compounds over time. “Prices change for things, right? And they’re not telling you, ‘Hey, this went up 20%.’ They’re just sending you a bill for it and you’re issuing a purchase order and then they’re changing it,” Matt explains.
This can be dangerous. Imagine a startup that sees a $50,000 discrepancy in a single month. They write it off and assume it will correct itself. However, it’s likely that the discrepancy arose because of some underlying issue. If it’s not addressed, the problem can snowball, resulting in a $300,000 discrepancy a few months down the road.
This type of scenario is actually very common among early-stage companies, which often lack the resources to manage inventory effectively. “90% of the companies that come to Propeller Industries struggle with inventory management,” Matt says. “It’s a nearly universal challenge among startups.”
How Does Inventory Valuation Impact Financial Statements?
Right now, fundraising is tough—and inventory valuation has a significant impact on a startup’s financial statements. Today’s investors are hyper-diligent, focusing not just on revenue growth but also on capital efficiency. Erratic margins (50% one month and 10% the next) signal a lack of visibility into inventory flow, which can be a red flag for potential investors.
“If you asked me three years ago, I would say erratic margins don’t matter,” Matt says. “As long as your revenue was going up and to the right, you were fine. But now, investors want to know: why is your money doing this?”
Revenue used to be the most important thing to investors, but in the current climate, it’s all about capital efficiency. Investors expect a cohesive financial story that reflects a company’s operational reality. If a company cannot accurately track its inventory and understand the full picture of costs, it risks presenting an incomplete or misleading financial narrative to investors.
Consistency in margins is crucial, but it should not be artificial. If margins are consistently flat (e.g., 75% month-over-month with no variation), that’s also bad. It could indicate that the company is manipulating numbers, which undermines credibility. When investors see that, they don’t take your numbers seriously. “You say ‘This costs $5,’ but they’ll hear ‘This costs $7.50.’”
Final Inventory Management Takeaways
“In the end, you can’t improve what you’re not measuring,” Matt concludes. Simply put, effective inventory management is crucial for startups that want to survive and thrive, especially in today’s competitive market.
That’s why a modern CFO’s role isn’t just about managing the books—it’s also about helping a company understand its performance, plan for the future, and make informed decisions about resource allocation.
At Propeller Industries, we understand the complex challenges of inventory management. Our CFOs work closely with founders to ensure that their businesses not only have wheels but are also moving in the right direction. With the right expertise and systems in place, you can avoid common inventory management pitfalls, accurately track your costs, and present a compelling financial story to investors.
If you’re looking for someone to help you navigate the complexities of inventory management, contact Propeller Industries today. Our experts can help you tell your financial story in a way that resonates with investors and drives growth.
Don’t wait until it’s too late—invest in your inventory management process today with the help of an experienced CFO. Let’s start a conversation.
