Technology Tip

Inventory Management for Small Businesses

Inventory Management for Small Businesses

Effective inventory management boosts small business profitability by helping companies optimize the amount of stock they carry, which improves cash flow and helps reduce storage and operating costs.

In the early stages, most small businesses rely on manual efforts to keep track of their inventory. But doing so leads to a number of potential risks, making it important for companies to replace manual processes with inventory management tools and software.

Keeping Track

At its heart, inventory management software helps you see, at a glance, how many items or the supply levels you have on hand. This is critical to understand because accurate inventory counts help you:

  • Improve cash flow by reducing the risk of investing in slow-moving items, or wasting money by storing items that are unlikely to sell quickly.
  • Reduce the risk of running low on popular items, or running out if you need to replace products with longer lead times.
  • Mitigate the risk of product shrinkage, if team members know inventory is monitored closely and effectively.
  • Free cash to purchase new products or invest in the company’s growth.

A lot of small business owners start by tracking inventory through spreadsheets, often by updating daily sales figures at the start of the following day. This approach manual often breaks if, for instance, if you miss a day or two and need to catch up - or if you make a data entry mistake such as transposing two numbers.

It’s faster and more accurate to include inventory features within your point-of-sale (POS) system software. Even basic systems offer inventory-level integrations such as real-time tracking of items as they are sold. Other common features include alerts if you run low on an item, with some systems and vendors offering automatic re-ordering to avoid selling out of a popular product.

Most systems help you track important details about items, such as the quantity on hand, purchase and sales prices, past sales and key vendor information.

Some inventory systems also include sales forecasting features that can help you maintain sufficient quantities of popular or seasonal items. By understanding how products sell throughout the year, you can have the appropriate quantities on hand throughout the year.

Verify Deliveries

An important inventory management procedure that a lot of companies overlook is verifying incoming orders from suppliers. It’s valuable to ensure your order was completed accurately by counting items as they are unpacked, and verifying those figures against the purchase order.

Some companies make the mistake of verifying an incoming order against the packing slip, but this leaves the company vulnerable to a mistake in the packing slip. If, for instance, you order 10 items, but the packing slip mistakenly lists seven items, your inventory may be inaccurate although the order was packed correctly.

Physical Counting

Although physically counting items you have on hand is a process that no one looks forward to, it’s an important part of effective inventory management. While it is important to conduct an annual physical audit for income tax purposes, smaller and more frequent "cycle counts" are also valuable to schedule.

For example, a clothing boutique may do a physical count of its denim jeans monthly, while counting faster-moving T-shirts weekly or twice a month. In addition to helping you maintain accurate inventory levels, cycle counts also provide a deterrence against employee theft.

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