Inventory Management 101: How to Manage Small Business Inventory
Year-end is a popular time for businesses to assess their profitability and make plans for the new year.
How has your small business’s inventory management panned out? Have you 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 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 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 maximizing sales. Good inventory management can help you track your inventory in real time to streamline this process.
By effectively managing your inventory you have the right products in the right quantity on hand and avoid products being out of stock and funds being tied up in excess stock. Ensure your products are sold in time to avoid spoilage, obsolescence, or 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
- Optimize warehouse organization and precious employee time
- Offer quick and painless bar code scanning to speed up intake
- Allow for multilocation management, tracking inventory across several locations or warehouses
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 factors such as 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 they were purchased or created. This is especially important for perishable products like food, flowers, and makeup. But 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.
- Audit your stock. Even with good inventory management software, periodically you still need to actually count your inventory to make sure what you have in 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 in place for tracking your stock levels, prioritizing the most expensive products. Good inventory management software saves you time and money by doing much of the heavy lifting for you.
Remember your ABCs. Many businesses find it helpful to have tighter inventory management controls over higher-value items by grouping inventory items into A, B, and C categories.
Products classified as A — big-ticket items — make up the smallest percentage of inventory and have the largest annual consumption value. Products grouped into the C category — the least expensive items — make up 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:
|Classification||Percentage of inventory||Annual consumption value|
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, your business sources raw materials, which you then turn 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 modeling 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 few of an item on hand can lead to a loss of potential customers. Imagine customers go to your brick-and-mortar store only to discover that their favorite product is out of stock. If you think they’ll just come back when the product is in stock, think again. A study of German consumers by GT Nexus found that 63 percent of shoppers who encountered out-of-stock inventory chose to buy the product from a competitor or didn’t buy it at all.
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 so you can order more in time.
Isn’t inventory management software expensive?
Not necessarily. While some inventory management software costs hundreds or even thousands of dollars, Square’s cloud-based software is free with sign-up.