Inventory Management 101: How to Manage Small Business Inventory

Inventory management is an integral part of your business.

Table of Contents

What is inventory management?

Inventory management is the part of supply chain management that aims to always have the right products in the right quantity for sale, at the right time. In doing this effectively, businesses reduce the costs of carrying excess inventory while maximising sales. Good inventory management can help you track your inventory in real time to streamline this process.

By effectively managing your inventory, you can ensure that you have the right products in the right quantity and avoid products being sold out or funds being tied up in excess stock. Be sure that your perishable products are sold in time to avoid spoilage and prevent your business from spending too much money on stock that’s taking up space in a warehouse or stockroom. So how do you avoid the traps of having too much or too little inventory? With inventory management software, of course.

Good inventory management software should:

  • 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 accessible right from your retail point-of-sale (POS) system
  • optimise warehouse organisation and precious employee time
  • offer quick and painless barcode scanning to speed up intake
  • allow for multi-location management, tracking inventory across several locations or warehouses

How to manage your inventory in 7 steps

Mastering the science of inventory management may seem like a daunting prospect to new business owners, and may even elude those that have run small businesses for years. Get it right, however, and you can usher in a new era of operational efficiency, reduced waste spending, better operational cash flow, and an improved customer experience.

Let’s break down the journey to efficient inventory management in 7 steps:

Fine-tune your forecasting

The first step towards mastering your inventory management is ensuring more accurate forecasting. This can only be accomplished with access to the right data, accessed in real time. Projected sales figures should be based on an eclectic range of data including:

  • historical sakes figures
  • broader market trends
  • predicted economic growth (inflation and recession)
  • marketing efforts such as campaigns and promotions

Don’t make the mistake of assuming that all your insights should come from business intelligence software. Warehouse, marketing and customer service teams can be an invaluable source of data that can influence your forecasting. Data silos are the enemy of efficient inventory management, so be sure to invest in tools that will provide access to data from all over your operation in real time.

Use the FIFO approach

The first in, first out or FIFO approach involves the selling of goods in the same chronological order that they were made or purchased. While this is a no-brainer for perishable goods such as food, decorative flowers and plants or cosmetics, it can also be useful when applied to non-perishable goods.

The FIFO approach acts as a guard against obsolescence, helping to prevent unsold goods from languishing on store shelves until they accumulate shelf wear and / or are replaced by a newer, more desirable equivalent and eventually need to be liquidated by selling at a drastically reduced rate.

FIFO is easy to understand and apply. In its simplest terms, it means adding new items from the back on the warehouse or storeroom shelf so the older products are pushed to the front. A measure this simple can help to reduce cost of goods sold and increase net income as the cheapest stock is always sold first.

Audit your stock

Inventory management software is great. But it doesn’t necessarily provide a granular overview of your inventory. As capable as it is, it has blind spots. For instance, it cannot account for missing inventory due to shoplifting, accidental damage or breakage.

This is why it is essential for businesses to audit stock. This can help mitigate the risks associated with inventory management such as over and understocking, pilferage and obsolescence.

Businesses use different techniques, including an annual, year-end physical inventory that counts every single item and ongoing spot-checking, which can be most useful for products that are moving fast or have stocking issues.

Use cloud-based inventory management software

When choosing an inventory management solution, it’s important to use a solution that is cloud-based, especially when managing inventory across multiple locations.

This provides inventory visibility across multiple sites that is updated in real time. Most software of this kind is designed to integrate seamlessly with your existing software infrastructure with a suite of automated functions that can reduce the unnecessary labour costs associated with inventory management. They also tend to have a host of analytics to aid forecasting and robust security to reduce the risk of downtime and blind spots.

Track your stock levels at all times

Another way in which software solutions can support efficient inventory management is by keeping constant track of stock levels. Integrating with your POS software, inventory management solutions update stock levels automatically. Because this data is stored centrally, staff at multiple locations can check availability of items across different sites. So if a customer wants an item that is out of stock in one location, it can be sourced from another location for the customer’s convenience.

This helps to eliminate guesswork when ordering new inventory, reducing the risk of stockouts for popular items and preventing excess stock of less popular items from impinging on cash flow.

Practise the 80/20 inventory rule for better inventory management

Also referred to as the ‘Pareto Principle’, the 80/20 rule states that 80% of consequences come from 20% of causes. When applied to the field of inventory management, the implication is that roughly 20% of your inventory accounts for 80% of your company’s profit.

As such, it behoves business leaders to identify and prioritise the 20% of inventory that is the most popular and/or profitable.

Applying this principle can help to prevent a disconnect between customer demand and inventory supply levels, ensuring that the products that drive profit get a proportionate level of attention.

Of course, the 80/20 figure may not be applicable for all businesses. Some may have a 90/10 or 70/30 split. The point is to identify the biggest drivers of profit and adjust patterns of ordering or manufacturer accordingly.

Remember your ABCs

Another principle that pairs well with the 80/20 rule is the ABC method of categorising inventory. This establishes a hierarchy of inventory in terms of the sales volumes that they command.

For instance:

  • A items are the top 20% of your products that drive 70% of sales volume
  • B items are the middle 30% that drive 20% of sales
  • C items ate the bottom 50% that drive 10% of sales

Having established this hierarchy, it becomes clear that A items should be prioritised to ensure that they are readily available and accessible for customers. Because they command the most profit, they also benefit from the most scrupulous management.

While B items are certainly important they can be spared the same level of scrutiny as A items as they are either less profitable or sell in lower volumes. less essential due to lower sales volume or profitability than A items. While C items certainly should not be neglected, they can be less of a focus as they have the least impact on sales volume and profitability.

The ABC rule can help companies take control of working capital and optimise revenues by refining lead times, safety stocks and reorder points for optimal efficiency.

Square makes managing inventory easier

Square’s retail POS offers free inventory management software that updates in real time and lets sellers manage their inventory from anywhere. Our system is great for omnichannel retail and syncs with your brick-and-mortar point of sale and online store.

It’s 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. You can learn more about how to use it here.

If you need a more complex solution, Square’s POS integrates beautifully with Stitch Labs, Shopventory and DEAR to manage inventory across multiple channels. Or work with a developer to create a custom inventory management software solution with the Square Items API.

Tips for businesses who make their own products

Some businesses own their whole supply chain — such as 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

In 2001, networking equipment giant Cisco learned the hard way what happens when supply outpaces demand. It wrote off $2.25 billion in raw materials and equipment components as a loss. One of the key factors for the loss was that Cisco’s inventory management modelling was way off and it poorly forecasted its sales figures.

Tips for retail businesses

But even if you aren’t a multinational business, good inventory management can help you save your business a ton of money. While it can be tempting to buy merchandise in larger quantities to take advantage of vendor discounts and free shipping, having excess stock isn’t always good for the bottom line.

Excess stock is problematic for a few reasons. To start with, you don’t want too large a portion of your business’s funds to be tied up in merchandise, and you could risk losing money if you’re not able to sell the products in time. (This is especially true for seasonal products. Ask any business owner who tries to sell Christmas ornaments after the 25th. Consumers naturally expect heavy discounts and you might sell at a loss if you sell the items at all.) Additionally, there are costs associated with storing excess stock.

On the flip side, having too little stock on hand can lead to a loss of potential customers. Imagine customers go to your brick-and-mortar store only to discover that their favourite product is out of stock. 8% of online sales are abandoned because of items being unavailable, and 77% of customers faced with out-of-stock items would like retailers to help them source it – if you are unable to deliver on the item, or promise of its timely arrival back in stock, that’s lost customers for your business.

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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, and don’t show you how your products are selling.

Do I really need software to manage my inventory?

Inventory management software is key to effectively running a modern retail business. Square’s inventory management software connects with your point of sale, so your stock levels are automatically adjusted every time you make a sale. Receive daily stock alert emails so you always know which items are low or out of stock and can order more in time.

Isn’t inventory management software expensive?

Not necessarily. When some software firms may charge you a hefty sum for their programs, Square’s cloud-based software is completely free.

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