There are few things more critical to the success of your small business than a robust and well-rounded inventory management process. The trouble is, if you’ve never had to manage inventory before, it’s tough to know where to start.
With inventory management, there can be dozens of moving pieces. It’s made even more complicated by the fact that there’s no one right way to manage inventory. What works for the business down the street may not work for yours.
In this article, we’ll give you a set of universal guidelines that you can tweak and explain the basics of how to take inventory for a small business.
How to take inventory for a small business
- What is inventory management?
- Maintain a high level of organization
- Receive inventory accurately
- Use the right tools
- Make data-driven decisions
- Have a formal process in place
- Do regular inventory counts
Streamline your purchase orders
Need a better system for your purchase orders? Use our free customizable purchase order template to organize your ordering process and save time.
What is inventory management?
Inventory management is a process and set of systems for managing inventory and stock. It’s a subset of the much broader supply chain management concept. For most retail businesses, inventory management is going to encapsulate the following tasks:
- Ordering stock
- Storing stock
- Selling stock
- Tracking stock levels
While these tasks may seem mundane, and even “simple” or “easy,” doing them (and doing them well) helps create a rock-solid foundation for your business to operate from. You’ll avoid potential problems and enjoy optimizations like:
- Prevent out of stock issues for your popular products
- Know the kinds of sales/promos to run to move underperforming stock
- Know the right quantity of items to keep on hand to maintain optimal cash flow
- If you sell perishable goods, it can help you avoid spoilage
Maintain a high level of organization
The first step in staying on top of your inventory is to organize your items with as much data and product information as possible. Successful inventory management is a direct result of strong data analysis. By starting with rich, accurate product data, you’ll avoid errors down the line and have an easier time investigating any issues you might uncover. Typically, this data would be entered into a point of sale (POS) system, but it’s also possible (but very tedious) to track this data with spreadsheets.
That being said, here’s some of the data you’ll want to input for each product:
- Supplier and Supplier ID
- Sales Price
- Tax Rate
- Discountable (Y/N)
- Cost per Item
- Current Quantity
- Reorder Trigger
- Recommended Order
If you sell items with variants, you’ll want to make sure that you enter each variant as part of a matrix. The classic example of an item with variants is a t-shirt that’s sold in multiple sizes and colors. Each combination of size and color is a unique variant of one parent product. By creating a matrix, you will be able to track the quantity, sales data and more for each variant on an individual basis.
Receive inventory accurately
Much like our first tip, you’ll want to ensure that you receive and input new stock from suppliers into your point of sale system as accurately as possible. Entering the wrong product quantity or mislabeling a product can cause a bunch of issues later down the line. The best way to ensure that you receive an input stock from suppliers accurately is to create a standardized process and follow it every time you receive a shipment.
Here’s an example of what that process might look like:
- Whoever is receiving the shipment should have a list of the items you’ve ordered or a copy of the original purchase order.
- The receiver should ensure that all expected boxes/packages are received (i.e. nothing is left in the truck).
- The receiver should unpack all boxes and compare the contents against the list or purchase order.
- If there are no errors or issues, go ahead and enter the shipment data into your POS, spreadsheet or other tracking systems.
- If there are issues, take note of them and contact your supplier. You can then enter the rest of the shipment into your system.
Because receiving an order accurately is such an important part of inventory management, you may want to handle this part of the business yourself, or rely on a trusted senior employee.
Use the right tools
Inventory management is a lot simpler when you use POS software. This is the case because of the quantity of data and the rate at which inventory turns over within most retail businesses. If you try to manage it all with a spreadsheet or pencil and paper, it’s highly likely that the task will start to feel like a burden that you want to skip at the end of a busy day. Plus, with so many moving parts, you increase the likelihood of errors, which can throw off all of your inventory data.
With a POS system, outside of creating your product catalog (typically done once during initial setup) and receiving new stock, inventory management is an automated process. When you sell a product, your stock levels are automatically updated. You can easily query your system to see how much you have of a product on-hand, and there are typically detailed inventory reports that you can use to better understand what’s going on in your business.
Make data-driven decisions
One of the main reasons to use a POS, especially from an inventory management perspective, is the variety of reports you’ll have at your disposal. These reports will cover everything from sales volume by product, profit margin analysis, inventory turnover rate and much more. With this information, you’ll be able to make more informed decisions that help you shape your overall business strategy. Here are a few of the insights that you can expect to derive from your point of sale system’s reporting capabilities:
- Identify your top selling items so you can prioritize keeping them well stocked
- Monitor profit margins per product so that you can identify opportunities to renegotiate with your suppliers
- Check your inventory value at any given time to understand how much capital you have tied up in inventory
If you’re an Excel wizard, it’s certainly possible to create similar reports with spreadsheet software and custom formulas. However, you’ll have a much easier time of it if you get a POS system and let it do the number crunching for you. Plus, this frees you up to focus on tasks to grow your business, like interpreting your reports and making better decisions based on your findings.
Have a formal process in place
While tools like a POS or dedicated inventory management software can help to simplify inventory management and allow you to get more value from your data, you still need an overarching process in place. Two of the most popular methods are First In, First Out (FIFO) and the average cost method.
Businesses that use FIFO make an effort to sell older stock before newer stock. For certain business types, like those that sell perishable goods, FIFO is a necessary means of deriving as much value from stock as possible. For example, imagine how a convenience store stocks drinks. Items in the front of their refrigerators typically expire sooner than objects placed in the back.
For the average cost method, businesses will assign the cost of an item based on the total cost of goods they purchased divided by the number of units purchased. This method is simpler to apply and less expensive than FIFO, making it an appealing option for items that are difficult to calculate costs for.
Regardless of the overarching system you use, it’s essential that you understand the pros and cons of each approach so that you can select the right one for your business.
Do regular inventory counts
Even if you have a POS system or inventory management tool in place, as well as a process for receiving stock, you’ll still want to do manual inventory counts periodically. Depending on the size of your business, you might do these on a semi-annually, quarterly or even monthly basis.
These counts are important because they function as a backup to your day-to-day system, and can help you uncover flaws in your process. If the idea of setting aside the time to count all of your inventory at once sounds a little overwhelming, you can also perform cycle counts.
Cycle counts are quicker checks where you count only a smaller portion of your inventory. For example, one month you might check your shoe inventory, and another your hat inventory. Besides saving you time, doing so can help you uncover issues much more quickly than a more massive quarterly check, though experts recommend that you do at least one full inventory count per year for income tax reporting.
Give your business stronger tools for inventory management
Inventory management is crucial to your business’s operations and success. Organizing your systems will go a long way as far as counting your items, setting up your floor, and making your employees more productive and efficient. Accurate counting means further discrepancies and a better bottom line for your business.
A POS like Lightspeed can automate inventory management for you and provide you with valuable information to help you make smarter decisions. Chat with our experts to see if our solutions are right for your business.
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