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It’s good practice to evaluate your business on a regular basis to make sure you’re on track to succeed. A big part of that is understanding the importance of inventory management and the role it plays in your operations.
Ask yourself: Have you always had the right products available when you needed them? Did you lose out on business when items were out of stock? Or did you lose money due to excess stock?
In this article, we discuss small business inventory management techniques, explain what to look for in good inventory management software and go over some best practices for managing inventory.
What is inventory management?
Inventory management is the process of controlling a business’s stock as it comes in and goes out, so you always have the right quantities of the right products available for sale at the right time. Good inventory management practices protect your cash flow and balance supply with customer demand while avoiding wastage.
When it’s done properly, inventory management helps businesses track inventory in real time to reduce the costs of carrying excess stock while maximizing sales.
How does inventory management work?
Inventory management works by using systems and processes to track stock levels in real time – from when products are ordered to the time they are sold.
Inventory management involves the following:
- Forecasting: Using historical sales data and seasonal trends to predict future demand and plan for optimum stock levels
- Purchasing: Ordering the right quantity of stock based on customer demand and supplier delivery timelines
- Tracking: Using a Point-of-Sale (POS) or inventory management software to monitor stock levels and sales in real-time
- Reordering: Replenishing low-running stock
- Reviewing: Analyzing sales reports to identify stock movements and opportunities to optimize stock levels
The exact approach can differ from business to business and industry to industry. A café, for example, manages fresh ingredients with short shelf lives, while a clothing retailer tracks seasonal styles and longer lead times.
No matter the model, the goal is always the same: Keep stock flowing smoothly so customers can find what they need when they need it.
Why is inventory management important?
The importance of inventory management comes down to protection and control: It protects your margins and keeps you in control of your operations. When you know what you have, what you need and when to reorder, you avoid stockouts, reduce excess stock and make smarter purchasing decisions. Strong inventory management also helps you plan for busy seasons, like holidays and back-to-school, and maintain the right balance of products on-hand.
Here are the key benefits of effective inventory management:
- Customer satisfaction: Customers can consistently find the products they want, which reduces missed sales and keeps them coming back.
- Cost reduction: You avoid unnecessary spending on excess stock, rush shipping or emergency restocks.
- Better cash flow: Money stays available for other areas of the business instead of being tied up in slow-moving or unsellable items.
- Operational efficiency: Clear processes for tracking, storing and replenishing stock help teams work faster and reduce errors.
- Better forecasting: Reliable data makes it easier to anticipate demand, plan for seasonal peaks and adjust order quantities with confidence.
- Optimized supply chain: Strong tracking and predictable reorder points help you coordinate with suppliers, navigate lead times and prevent bottlenecks.
- Product quality: You reduce spoilage, damage and obsolescence by moving products through your system at the right pace.
Once you understand the importance of inventory management, it becomes easier to justify investing time and budget into the right systems and processes.
What to look for in inventory management software
The right small business inventory management software shows you exactly what you have, what’s selling and what needs to be reordered so you can stay in control of your stock.
Look for inventory management software that can:
- Reduce costs, improve cash flow and boost your business’s bottom line
- Track your inventory in real time
- Help you forecast demand
- Prevent product and production shortages
- Prevent excess stock and too many raw materials
- Allow for easy inventory analysis on any device
- Be accessed directly from your point-of-sale (POS) system
- Optimize warehouse organization and employee time
- Offer quick bar code scanning to speed up intake
- Support multilocation management so you can track stock across multiple locations or warehouses
Inventory management techniques and best practices for small businesses
Understanding the importance of inventory management makes it easier to choose the right methods for staying organized and avoiding stock issues. Here are some of the techniques that many small businesses use to manage inventory:
1. Fine-tune your forecasting
Accurate forecasting is vital. Your projected sales should be based on factors such as historical sales figures (if you sell with Square, look to your Square Dashboard for this info), market trends, predicted growth and the economy, promotions, marketing efforts, etc.
2. Use the FIFO approach (first in, first out)
Goods should be sold in the same chronological order as they were purchased or created. This is especially important for perishable products like food, flowers and makeup. A bar owner, for example, has to be aware of the stock behind the bar and apply FIFO methods to improve bar inventory. It’s also a good idea for nonperishable goods since items sitting around for too long might become damaged, or otherwise out-of-date and unsellable. The best way to apply FIFO in a storeroom or warehouse is to add new items from the back so the older products are at the front.
3. Identify low-turn stock
If you have stock that hasn’t sold at all in the last six to 12 months, it’s probably time to stop stocking that item. You might also consider different strategies for getting rid of that stock, like a special discount or promotion, since excess stock wastes both your space and capital.
4. Audit your stock
Even with good inventory management software, you still need to count your inventory from time to time to make sure what’s on the shelf matches what’s in your system. Businesses use different techniques, including an annual, year-end physical inventory that counts every single item as well as ongoing spot-checking, which can be most useful for products that are moving fast or have stocking issues.
5. Use cloud-based inventory management software
Look for software with real-time sales analytics. Square inventory management software connects directly to your point of sale system, so your stock levels are automatically adjusted every time you make a sale.
6. Track your stock levels at all times
Once your system is in place, use it to monitor key items closely, especially high-value or fast-moving products. Set alerts, review reports frequently and adjust reorder points so you can stay ahead of demand and prevent stockouts.
7. Don’t forget quality control
It’s important to ensure that all your products look great and are working well. Ask employees to do a quick check for signs of damage and incorrect product labelling during stock audits.
8. Hire a stock controller
If you have a lot of inventory, you might need one person who is responsible for managing it. A stock controller processes all purchase orders, receives deliveries and makes sure that everything coming in matches what was ordered.
9. Remember your ABCs
Many businesses find it helpful to have tighter controls over higher-value items by grouping inventory items into A, B and C categories. A items are big-ticket products that make up a small share of your inventory but account for the highest annual consumption value, B items sit in the middle in both value and volume and C items are the least expensive products, make up the largest share of inventory and have the lowest annual consumption value. Annual consumption value is calculated by multiplying annual demand by an item’s cost.
Tips for businesses that make their own products
Some businesses own their whole supply chain, like a producer and seller of handmade messenger bags. Rather than sourcing finished products from other vendors, these businesses source raw materials, which are then turned into items to sell.
Inventory for these kinds of businesses usually consists of three categories:
- Raw materials used to make products
- Work-in-progress pieces
- Finished products
Once you know how much inventory sits in each category, the raw materials you buy, the work-in-progress items currently being made and the finished products ready to sell, you can track how they move through your production process. Knowing what you have at every stage helps you spot bottlenecks, plan production more accurately and set the right reorder points for materials and completed goods.
Accurate forecasting also plays a major role for businesses that rely on long lead times or advance purchasing. These retailers often need to predict demand months ahead so they can secure materials, maintain stock levels and avoid gaps in their supply. Strong modelling helps them buy with confidence and plan their cash flow more effectively. With Square inventory management, sellers can use real-time sales trends, inventory reports and automated alerts to forecast demand more accurately and make smarter purchasing decisions.
Tips for retail inventory management
Smart retailers understand the importance of solid inventory management. The right process can help protect your margins and save your business money by preventing common issues that come with buying too much or too little stock.
Keep the following inventory management tips in mind:
- Avoid overbuying: Large orders with vendor discounts can be tempting, but excess stock ties up cash and may not sell, especially if it is seasonal items like Christmas and Halloween decor.
- Be aware of storage costs: Extra inventory takes up space and can increase warehousing expenses and eat into profits.
- Improve product tracking: Poor tracking can create major problems such as mismatched barcodes or misplaced stock, which can lead to empty shelves and frustrated customers.
- Set regular reorder points: Monitor your sales trends closely so you can reorder before shelves run empty. Most retailers calculate their reorder points based on sales velocity, supplier lead times and a buffer of safety stock to prevent stockouts. When popular items run out, customers often go elsewhere. KPMG Canada’s 2025 consumer study found that 86% of Canadians are more likely to shop with retailers who manage inventory well and keep products reliably in stock.
- Provide real-time visibility into inventory: The 2025 SPAR Consumer Survey found that 74% of shoppers said being able to check whether a product is in stock is the single most important factor when deciding to shop in-store. Retailers that offer this kind of self-serve access for customers create a better, more convenient shopping experience than competitors who don’t.
Reconciling lost, damaged or stolen items
A loss of inventory in a retail store before it can be sold is often referred to as shrinkage. The average shrink percentage in the retail industry is 2% and according to a report from the Retail Council of Canada, Canadian retailers lose an estimated $9 billion a year to theft, accounting errors and damaged products.
Shrinkage is an expensive problem for businesses because you lose both the value of the inventory and the revenue you would have earned from selling it.
To offset these losses, some retailers raise prices, but that can turn away customers who are sensitive to cost. Others invest in extra measures to cut down on theft and loss, like added security, which ends up increasing overall expenses.
Shrinkage is something you need to factor into your bottom line, but you don’t always have to absorb the full cost. It’s worth checking with your tax adviser to see if casualty or theft losses related to inventory can be deducted on your personal or corporate return.
Square makes managing inventory easier
Square for Retail offers free small business inventory management software that updates in real time and lets sellers manage their inventory from anywhere. Our system is suitable for omnichannel retail and syncs with your brick-and-mortar point of sale and online store.
Square is quick to set up and easy to use. Download reports and receive a daily stock alert with items that are low or out, so you always know how much you have in stock.
If you need a more complex solution, Square for Retail integrates with Stitch Labs, Shopventory, MarketMan, Sku IQ and DEAR Systems to manage inventory across multiple channels. Or work with a developer to create a custom inventory management software solution with the Square Items API.
How to track and manage inventory in the Square app
The Square cloud-based inventory management software, included free with the Square POS app, gives you the tools to enable and track inventory by item or in bulk. For items with inventory enabled, the stock count updates based on sales from the Square app, Square Invoices and your online store. Inventory is tracked and managed on a per-location basis (and can be done with SKUs).
How to track inventory by item
To enable item tracking in your inventory:
- Visit the Item Library in your Dashboard.
- Select an item.
- Adjust the count of an item and its location (inventory is established, edited, and tracked on a per-location basis).
Once you’ve enabled inventory, you will receive alerts in your Dashboard for low-stock or sold-out items, so you’ll know when to reorder and restock. Get the step-by-step instructions for managing items in our Support Centre.
How to bulk upload inventory
Have a bunch of items to enable? Don’t worry — you can download a report of your current inventory and update your inventory quantities in bulk using the import tool. This is especially helpful for adding new inventory and verifying current stock.
All you have to do is:
- Visit the Item Library in your Dashboard.
- Click Modify Item Library.
- Download our template file (this includes your entire item library).
- Open the file and add your inventory by item in the column labelled New Quantity [Location].
- You can also update your Stock Alert Enabled [Location].
- Save the file, then drag and drop it into the Import Inventory window and click Upload.
Learn more about getting started with Square for Retail for free.
Inventory management FAQs
Why is inventory management important for small businesses?
Inventory management matters for small businesses because it helps keep operations predictable and profitable. When you understand the importance of inventory management, you can avoid running out of popular items or buying more stock than you can realistically sell. Clear visibility into what you have and what you need next protects cash flow, prevents unnecessary spending and makes it easier for customers to find the products they’re looking for.
What tools do I need to track inventory effectively?
You don’t need a huge tech stack to track inventory well. Start with a POS system, like Square for Retail, that updates stock in real time and shows what’s selling and what needs to be reordered. From there, tools like barcode scanners and clear labelling systems help keep everything organized and accurate.
Aren’t spreadsheets a good way to manage inventory?
Spreadsheets aren’t an effective inventory management tool because they have to be updated manually, which is time-consuming and means the data is almost always out of date. Also, spreadsheets can’t scale with your business, can’t communicate with your POS system and don’t show you how your products are selling.
Do I really need software to manage my inventory?
You need inventory management software when manual tracking starts costing you time, sales or cash. As your business grows, it becomes harder to know what’s in stock and what needs reordering. Inventory management software updates stock automatically as sales happen and alerts you when items run low, helping you keep products available and make smarter inventory decisions.
Isn’t inventory management software expensive?
Not necessarily. When some software may charge you a hefty sum for their programs, cloud-based POS software, like Square for Retail, includes core inventory management features at no additional monthly cost.
