Inventory Management 101: How to Manage Small Business Inventory

Inventory Management 101: How to Manage Small Business Inventory
Running out or having excessive stock are bad for your bottom line. Learn inventory management techniques to have the right products when you need them.
by Square Jan 24, 2024 — 9 min read
Inventory Management 101: How to Manage Small Business Inventory

It’s important to evaluate your business on a regular basis to ensure that you’re on track to succeed. One of the most integral parts of your business is inventory management. 

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 basic 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. When done 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 can 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. You can also ensure your products are sold in time to avoid spoilage or obsolescence, or spending too much money on stock that’s taking up space in a warehouse or stockroom.

Good inventory management software should:

Inventory management techniques and best practices for small business

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 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.
  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 cognizant of the materials 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, 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.
  5. Use cloud-based inventory management software. Look for software with real-time sales analytics. Square’s software connects directly to 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.
  6. Track your stock levels at all times. Have a solid system in place for tracking your stock levels, prioritizing the most expensive products. Effective software saves you time and money by doing much of the heavy lifting for you.
  7. Reduce equipment repair times. Essential machinery isn’t always in working order, so it’s important to manage those assets. A broken piece of machinery can be costly. Monitoring your machinery and its parts is crucial to understanding its life cycle, so you can be prepared before issues arise.
  8. Don’t forget quality control. No matter your specialty, it’s important to ensure that all your products look great and are working well. It could be as simple as having employees do a quick examination during stock audits that includes a checklist for signs of damage and correct product labeling.
  9. Hire a stock controller. Stock control is used to show the amount of inventory you have at a given time and applies to all items from raw materials to finished goods. If you have a lot of inventory, you might need one person who is responsible for it. A stock controller processes all purchase orders, receives deliveries, and makes sure that everything coming in matches what was ordered.
  10. 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.
  11. Consider drop shipping. If your business adopts drop shipping methods, you can sell products without actually holding the inventory yourself. Instead, a wholesaler or manufacturer is responsible for carrying the inventory and shipping the products when a consumer buys from your store. That way, you don’t worry about inventory holding, storage, or fulfillment. Many owners who start an online store adopt drop shipping methods, but this supply chain fulfillment strategy can be adopted by many types of businesses across all industries.

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:

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

Square for Retail

A point of sale inventory system built for small business

Square’s retail POS offers robust 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.

Our inventory management system 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. 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. With a number of avenues at your disposal, Square makes switching your POS system seamless so you can keep your business moving and inventory flowing. 

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How to track and manage inventory with Square

Square’s free cloud-based inventory management software 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:


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 Center.

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:

  1. Visit the Item Library in your Dashboard.
  2. Click Modify Item Library.
  3. Download our template file (this includes your entire item library).
  4. Open the file and add your inventory by item in the column labeled New Quantity [Location].
  5. You can also update your Stock Alert Enabled [Location].
  6. Save the file, then drag and drop it into the Import Inventory window and click Upload.

You can learn more about managing inventory using an Inventory CSV in our Support Center.

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:

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 retail 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.

Pro Tip

According to Square’s 2024 Future of Retail report, 29% of consumers now want an automated tool to check product information or inventory. Learn more about how to automate your inventory management

Reconciling lost, damaged, or stolen items

A reduction of inventory in a retail store is often referred to as shrinkage. The average shrink percentage in the retail industry is two percent. And in 2016, shrinkage cost retailers more than $49 million in losses, according to the National Retail Security Survey on retail theft.

There are four main categories of inventory shrinkage due to loss and theft. According to a 2014 study, shoplifting accounts for 38 percent of retail shrinkage, employee theft accounts for 34.5 percent, paperwork errors make up 16 percent, and supplier or vendor fraud accounts for seven percent. Some experts also have a fifth category that encompasses all unknown reasons for inventory loss; it makes up six percent of all inventory shrinkage.

When goods are damaged they are also included as part of shrinkage. The damage may happen while en route to your store or in the store itself.

However it happens, shrinkage is a very costly problem for retailers and can result in a loss of profit. And it’s a double hit — you can’t recoup the cost of inventory and you can’t sell the inventory to make revenue.

To cover these potential losses, you might increase the prices of your goods, passing the cost to your customers. But that can backfire if customers are price sensitive. You might also need to increase processes that stem theft and loss — like security — which ups your overall budget.

While shrinkage is something that you need to factor into your bottom line, you don’t have to simply absorb it as a cost of doing business. It is advisable to talk to your tax adviser to understand if you can deduct the casualty and theft losses related to inventory on your personal or corporate tax return.


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.

Is 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. See how Square stacks up against other POS systems.

What inventory management apps does Square currently offer?

Square has two apps small businesses can use to manage their inventory: Square Point of Sale and Square for Retail.

If you own a business with only one location, Square Point of Sale should be a great fit for you. But if you’re managing multiple retail stores, we recommend Square for Retail since this inventory management system lets you manage inventory across multiple locations (including stock transfers between locations), create or receive purchase orders, manage vendors, and run COGS reporting. Investing or switching your POS 

Here are the differences between the two apps:

App Square Dashboard Square for Retail
Cost Free $60/month/per register
Bulk item upload Yes Yes
Stock control across multiple locations Yes Yes
Set low stock alerts Yes Yes
Receive stock in app No Yes
Create and print bar code labels from Dashboard No Yes
Reconcile shrinkage / mark items as lost No Yes
Track lost, damaged, or returned inventory No Yes

Need help managing your inventory? Try Square for Retail free for 30 days.

The Bottom Line is brought to you by a global team of collaborators who believe that anyone should be able to participate and thrive in the economy.


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