How To Manage Inventory: Methods, Tips, and Best Practices

Inventory management for any business comes down to keeping what customers want in stock without tying up cash in extra inventory (or last season’s leftovers).

How has your inventory held up lately? Did you have the products customers wanted, or did you lose sales when items were out of stock? Did excess stock tie up money you could have used elsewhere?

Below, you’ll learn basic inventory management techniques, which features to look for in good inventory management software, and best practices for managing inventory.

What is inventory management?

Inventory management is the part of supply chain management that aims to have the right products for sale, in enough quantity, when customers want them. It covers the whole cycle: ordering, storing, tracking, and selling. Inventory control is the in-store piece of that cycle, keeping counts accurate and stock secure.

Effective inventory management helps reduce the cost of carrying excess stock while keeping enough products available to maximize sales. Real-time tracking provides up-to-date visibility into stock levels, making it easier to manage inventory and respond to changes in demand.

It can also help you sell products before they spoil or become obsolete, while reducing the money tied up in slow-moving stock and the space required to store it.

How to manage inventory for a small business

To manage inventory for a small business, build a complete list of what you sell, track it with one consistent method, and reorder before you run out. Then count on a schedule and use your reports to adjust.

1. List every item. Record each product with its SKU and variations (such as size or color).
2. Choose a tracking method. Perpetual tracking updates counts in real time through your point of sale. Periodic tracking relies on manual counts.
3. Set par levels and reorder points. A par level is how much you want on hand. A reorder point tells you when to order more.
4. Record vendor lead times and terms. Note how long each supplier takes to deliver, plus order minimums and payment terms.
5. Receive stock against purchase orders. Check each delivery against what you ordered before adding it to your counts.
6. Count on a schedule. Pair full counts with cycle counts (smaller, more frequent checks of specific items).
7. Review reports and adjust. Use sales and stock reports to spot slow sellers and fine-tune order quantities.

What to consider in inventory management software

Good inventory management software should:

• Reduce costs, improve cash flow, and boost your business’s bottom line
• Track inventory in real time
• Help you forecast demand
• Prevent product and production shortages
• Prevent excess stock and too many raw materials
• Let you analyze inventory on any device
• Be accessible directly from your retail point of sale
• Optimize warehouse organization and precious employee time
  • Offer barcode 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 small businesses use to manage inventory:

1. Fine-tune your forecasting. Accurate forecasting is vital. Base your projected sales calculations on factors such as historical sales figures (for example, Square Dashboard reports have this info), market trends, predicted growth and the economy, promotions, marketing efforts, etc. For more ideas, try these inventory forecasting strategies.
2. Set reorder points. Reorder point = average daily unit sales × supplier lead time in days + safety stock. For example, say you sell four units a day, and your supplier takes seven days to deliver. With 10 units of safety stock, you reorder at 38 units (4 × 7 + 10).
3. Use the FIFO approach (first in, first out). Sell goods in the same order you bought or made them. 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.
4. Identify low-turn stock. If an item hasn’t sold in several months, review it, then decide whether to discount it, bundle it, or stop reordering. How long “several months” is depends on your product: seasonal and perishable items need a shorter window. You might also consider different strategies for managing excess inventory — like a special discount or promotion — since excess stock wastes both your space and capital.
5. Audit your stock. Even with good inventory management software, it’s still worth counting your inventory periodically 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.
6. Use cloud-based inventory management software. Choose software with real-time sales analytics that 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.
7. 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.
8. 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.
9. 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 brief examination during stock audits that includes a checklist for signs of damage and correct product labeling.
10. Hire a stock controller. Stock control shows 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 assign one person to own it. A stock controller processes all purchase orders, receives deliveries, and makes sure that everything coming in matches what was ordered.
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 customer 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 many types of businesses across all industries can adopt this supply chain fulfillment strategy.
12. 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. 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.

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According to the ASCM, here’s how the groups usually break down:

How to track inventory with Square

Square’s retail POS offers robust inventory management software that updates in real time and lets you manage your inventory from anywhere. It’s built for omnichannel retail and syncs your brick-and-mortar point of sale with your 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 sort your stock overview by stock level, location, or incoming orders, and use aging inventory reporting to spot dead stock. For counts on the sales floor, Square Handheld has a built-in barcode scanner.

Need more advanced tools? You can browse third-party inventory apps in the Square App Marketplace, or work with a developer to build a custom solution with Square APIs. When you’re ready to change systems, you can plan the move with these tips on switching your POS system.

• 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
• 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

Learn how Rustler Hat Co. manages high order volumes

Watch the episode -/^

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.

Discover how loyal customers power local business growth

Read now -/^

The chart below shows (based on recommendations from Lokad) how businesses can break this down:

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.

Learn how Rustler Hat Co. manages high order volumes

Watch the episode -/^

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.

How to turn on inventory tracking

You can turn on and track inventory for individual items or in bulk. For items with inventory enabled, the stock count updates based on sales from the 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 (you set up, edit, and track counts so you can manage inventory by location).

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 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.

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How to transfer inventory between stores

To transfer inventory between stores, you record the move from one location to another, ship or carry the goods, and confirm what arrives so both locations’ counts stay accurate. Retailers often move stock when one store has more of an item than it can sell and another is running low.

If you use Square with more than one location, transfer orders handle the process from your Dashboard:

1. Create the transfer order: In your Dashboard, go to Items > Inventory management > Transfer orders and select Create transfer order.
2. Choose your locations: Enter the source and destination locations, plus an expected transfer date and a tracking number if you have one.
3. Add items and quantities: Search by item name or SKU. The list shows items available at the source location.
4. Save or create the order: Save it as a draft, or create the order when you’re ready to ship.
5. Receive the items: When the shipment arrives, open the transfer order in your Dashboard or in the POS app with retail mode turned on, select Receive items, adjust quantities for anything missing or damaged, and confirm.

Moving stock across town without tracking it in transit? You can also transfer stock directly from your Dashboard. Counting items before they leave and again when they arrive helps you catch discrepancies early and keeps both stores’ records accurate.

Tips for businesses who make their own products

• 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 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 can tie up too much of your business’s cash in merchandise and increase the risk of losing money if products do not sell in time. This is especially true for seasonal merchandise. Demand for products like Christmas ornaments typically drops after the holiday, which may require you to offer steep discounts or leave items unsold.

Carrying that stock costs money, too: ASCM puts annual carrying costs at 10%–35% of inventory value, depending on the industry.

On the other hand, carrying too little inventory can lead to stockouts and missed sales. If customers visit your store and find that a favorite product is unavailable, they may wait, choose an alternative, or purchase it elsewhere. Repeated stockouts can ultimately affect customer satisfaction and loyalty.

Pro Tip

According to the 2025 Future of Retail report from Square, 70% of retail leaders now rely on data analytics to guide their purchasing decisions, a shift that helps them stock the right products and reorder before they run low.

See how to automate your inventory management.

Save time with business tools that work together — and work for you

Learn more -/^

FAQ

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.

How do you choose inventory management software?

Focus on fit rather than cost. Look for real-time tracking, demand forecasting, low-stock alerts, and multi-location support that match how you sell. The best option connects to your point of sale so your stock counts stay accurate with every sale.

Why is inventory management important?

Inventory management keeps the right products on hand without tying up cash in excess stock. It helps you avoid lost sales from stockouts, cut spoilage and shrink, and forecast demand more accurately. Over time, that adds up to healthier margins and a smoother experience for your customers.

How do you manage inventory in a small business?

Start by forecasting demand from your sales history and seasonal trends. Track stock in real time so counts stay accurate with every sale. Run regular audits or cycle counts to catch discrepancies, and set reorder points so you restock before you run out.

What inventory management apps does Square currently offer?

Square Point of Sale and Square Dashboard include tools to track stock levels, adjust inventory, and receive low-stock alerts.

Square also offers advanced inventory tools to manage vendors, create purchase orders, and track stock transfers between locations. Cost of goods sold (COGS) reports help you understand product costs and profit margins.

Footer disclaimer: The information provided in this publication is for general informational purposes only.