It’s a tricky balance: How do you keep a good assortment of products—but not too many? How do you keep your stock low—but not too low? How can you increase your inventory turnover—but at the right profit level? It can be hard to find just the right recipe, especially when seasonal products enter into the mix, so let’s explore the basics and some inventory management techniques you might find helpful.
An inventory system will also help you know if you have a theft problem, whether from employees on the inside or customers on the outside. If you run a manufacturing company, you must keep track of raw materials, goods in the process of being made, and finished products.
All of these represent money that’s tied up until the product leaves your factory and gets purchased and paid for. If you’re a retailer, it’s a similar story, with merchandise sitting on shelves or stacked in your storeroom.
Most likely, the stock of items you need to do business makes up a large portion of your investment, and managing it is key to making the most money, especially for small businesses that are less likely to be able to absorb the kind of losses inventory issues can cause.
Choosing an Inventory Management System
The first step to managing your inventory properly is knowing what you have on hand. You can go as simple or as fancy as you like, depending on the nature of your business and how many items you’re dealing with. For some businesses, a simple logging system would suffice, while for others, a computerized setup is much better.
Manual Inventory Record Keeping
If you don’t carry a lot of different items, or you don’t move many each day, a stock book where you log transactions might be fine. You list the types of items in one column, and write down the sales in another. This tells you at a glance how many of each have been sold. You can do this in an actual notebook or set up a basic spreadsheet on a computer. This is the simplest form of inventory management, and it works best when just one or two people enter information and there are only a few different items to keep track of.
There are a couple of methods of manual logging to consider. You can use tags, cards or tickets to track each type of product, entering them in your log as they sell. You can also use sales receipts from your cash register, comparing them with delivery receipts to figure out how much has been sold.
Remember that you MUST be sure to enter every sale or you might get caught short. The accuracy of a manual system, and therefore its usefulness to you, is totally dependent on how you use it.
It’s limited in how useful it is for analyzing sales data, but manual tracking might work quite well for you in the beginning stages of your business, especially if you’re not dealing with a large size or variety of products. As the number of items you sell or manufacture grow, however, you may want to think about using a computerized system for inventory control.
Computerized Inventory Management Systems
Today, when most of us are so used to using computers, tablets and smartphones, it makes sense to bring their speed and utility to inventory management. Even owners of very small businesses will usually benefit from a more automated system of inventory tracking. Without too much of a learning curve, you could spend far less time entering data and get far more useful information than trying to do it manually.
There are a couple of different types of computerized systems, from programs that are designed to track your inventory through the warehouse and manufacturing end, to those designed more for retail applications. Some even tie right into your accounting software, automatically updating cash flow reports and income projections.
Point Of Sale (POS) Systems
With this type of system, your cash register doesn’t just ring up sales and figure out the proper change, it’s part of a system that also keeps track of your inventory. Retail stores, bars and restaurants generally find POS systems very helpful in managing inventory and supplies.
With each sale, you get an updated, real-time look at where things stand, and can tell at a glance which items are selling and need to be reordered, and which are not and might need to be discounted to move. You can also enter other information during a transaction, such as customers’ email addresses or cell phone numbers, which can be very helpful to your marketing efforts.
If you’re considering using a POS system, look into the types of reports it will give you and how easy it will be to use to track your inventory. You want to easily be able to add new items into inventory and set alerts for things that are running low.
POS systems are customizable, but usually include the software, cash register, receipt printer, bar code scanner, and credit card reader. If you can’t afford to go with a full-blown system, start small and add on as you need to. There are even free and very inexpensive POS apps for your smartphone!
Inventory Management Software
Many businesses find it helpful to integrate their inventory tracking with their business accounting. Tying the two together will easily help you understand the bottom line impact of inventory on your finances.
QuickBooks has several add-on products that will track inventory, including an inventory module and a POS program.
Sage Peachtree also offers inventory management as part of its product suite.
Software consulting firm Capterra has a comprehensive list of inventory management titles and reviews if you want to explore further.
Basic Inventory Management Techniques
Whether you’re using a manual method or going computerized, knowing what your inventory is will help you manage it to make the most money you can. Some techniques to consider:
Set Up Reorder Points
For items that are selling well and you plan to continue carrying, set up a minimum level at which you’ll want to reorder. When the number you have on hand reaches that reorder point, you’ll generate an order. You can do this manually or set your inventory management software to do it automatically.
Clear Out Slow Sellers
If you’ve had items in inventory for a long time, think about discounting them to move them out. They’re doing you no good sitting on the shelf, so it may pay to sell them for less and put that money to better use on faster-selling items. One exception to this might be seasonal items that may still be in style and sell later on.
If sales have increased for a product and you expect that will continue, increase your order quantities or put in a special order to make sure you don’t run out. Be careful not to overinvest in fads or trends, but timing it right could benefit you greatly.
No matter which type of software or manual method you choose, you will need to do a periodic physical inventory, counting what’s on hand and comparing it to what your records say. Make a list of what you’re “supposed” to have, then count what is actually in stock. This way you can account for any losses due to theft or the misplacement of goods, and tighten up procedures to cut down if that’s happening.