Inventory Management 101: How to Manage Small Business Inventory

Evaluating your business regularly is crucial to ensure it’s on track for success. Effective inventory management is one of the most integral parts of a thriving business.

How has your small business’s inventory management strategy panned out? Have you had the right products available when you needed them? Did you miss out on potential sales due to out-of-stock items or lose money because of excess stock?

In this article, we’ll cover inventory management techniques, explore essential functions of inventory management, explain what to look for in software to make the process easier and go over some best practices for keeping track of your inventory.

What is inventory management?

Inventory management is a part of supply chain management that ensures the right products are available in the right quantities at the right time. This process helps businesses minimise excess costs while maximising sales. Whether you run a brick-and-mortar store or are selling online, effective inventory management enables real-time stock tracking, streamlining operations for smoother, more efficient business management.

By managing inventory effectively, you can ensure that the right products are always in stock, prevent inventory shortages, and avoid tying up funds in surplus stock. Timely sales of perishable goods reduce spoilage, and overall, you spend less on stock that takes up space in a warehouse or stockroom.

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
• Optimise warehouse organisation and precious employee
• Allow for multi-location management, tracking inventory across several locations or warehouses

And lastly, good inventory management software should be accessible right from your retail point-of-sale (POS) system, offering features that reduce costs, improve cash flow, and boost your business’s bottom line. If you’re considering a POS system upgrade or implementation, exploring the best POS options can help you choose a system that integrates inventory management, enabling real-time tracking and multi-location inventory control to meet customer demand effectively.

Functions of inventory management

To optimise your business’s inventory, understanding the core functions of inventory management is essential:

1. Cost reduction: Good inventory management can lower costs by ensuring items are purchased and stored effectively, reducing excess stock, and saving valuable capital.
2. Demand forecasting: Forecasting demand accurately helps your business prevent shortages, avoid surplus, and better allocate resources.
3. Stock tracking and reordering: With effective inventory management tools and efficient SKU use, you can automatically reorder products to prevent out-of-stock situations and maximise sales.
4. Warehouse optimisation: Optimising storage and inventory placement within the warehouse increases employee efficiency.
5. Multi-location management: For businesses with multiple locations like Brother Hubbard, tracking inventory across stores or warehouses is critical to meet demand seamlessly. 

Inventory management techniques and best practices

Here are some of the techniques that many businesses use to manage inventory:

• Fine-tune your forecasting: Accurate forecasting is vital to effective inventory management. Your projected sales calculations should be based on historical sales figures (if you sell with Square, look to your online Dashboard for this info), market trends, predicted growth and the economy, promotions, marketing efforts, etc

• Use the “FIFO” approach (first in, first out):  Goods should be sold in the same chronological order as purchased or created. This is especially important for perishable products like food, flowers and make-up. But it’s also a good idea for non-perishable 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 stockroom or warehouse is to add new items from the back so the older products are at the front.

• Audit your stock:  Even with good inventory management software, periodically, you need to count your inventory to ensure your stock matches what you think you have. 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: Look for software with real-time sales analytics.

• Track your stock levels at all times. Have a solid system for tracking your stock levels and prioritising the most expensive products. Good inventory management software saves you time and money by doing much of the heavy lifting.

• Remember your ABCs. By grouping inventory items into A, B and C categories, many businesses find it helpful to have tighter inventory management controls over higher-value stock. Products classified as A — big-ticket items — comprise the smallest percentage of inventory and have the largest annual consumption value. Products grouped into the C category — the least expensive items — comprise the largest percentage of inventory and have the lowest annual consumption value. B products are in between. Annual consumption value is annual demand multiplied by an item’s cost. The chart below shows (based on recommendations from Lokad) how businesses can break this down:

ABC Inventory Analysis Example

Classification	Percentage of inventory	Annual consumption value
A	10-20%	70-80%
B	30%	15-25%
C	50%	5%

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 bricks-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 of stock so you always know how much you have.

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

Even if you aren’t a multinational business, good inventory management can help you save your company a ton of money. While buying merchandise in larger quantities can be tempting 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 25th December. 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 can lead to losing potential customers. Imagine customers going to your bricks-and-mortar store only to discover their favourite product is out of stock. Many online sales are abandoned because of items being unavailable. If you cannot deliver the item or promise its timely arrival back in stock, your business will lose customers. Ensuring successful customer interactions by keeping popular items available and managing stock levels effectively can make all the difference in customer loyalty and repeat business.

Inventory Management FAQs

Aren’t spreadsheets good for inventory management?

Spreadsheets can’t match inventory management software. They require manual updates, are time-consuming, and lack integration with POS systems.

Do I really need inventory management software?

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 then order more in time.

What is the meaning of inventory, and why is it important for businesses?

Inventory refers to the goods and materials a business holds for resale or production. It’s a crucial asset because it directly impacts a company’s ability to meet customer demand, maintain steady cash flow, and support growth. Understanding the meaning of inventory helps businesses implement effective inventory management practices, allowing them to balance stock levels, reduce costs, and improve customer satisfaction.

What are the main functions of inventory management, and how can it benefit my business?

The primary functions of inventory management include tracking stock levels, forecasting demand, reducing excess inventory, and ensuring product availability. Effective inventory management enables businesses to maintain the right amount of stock, avoid lost sales, and streamline operations. This results in better cash flow, reduced storage costs, and more efficient use of resources, ultimately contributing to a healthier bottom line.

Is inventory management software expensive?

Not always. Square offers free, cloud-based inventory management software that provides real-time updates and easy integration with your POS system.

Effective inventory management is a powerful tool that empowers businesses to reduce costs, meet customer demand, and improve cash flow. With the right techniques and software, small businesses can handle inventory challenges, avoid costly stock issues, and focus on growth. By investing in smart inventory management practices, your business is well-positioned to adapt, thrive, and serve customers with the right products at the right time, every time.