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How to Do Inventory Management for Your Small Business

How to Do Inventory Management for Your Small Business
Updated May 23, 2023
Julie Bawden-Davis
Written byJulie Bawden-Davis
Zachary Ace Aiuppa
Edited byZachary Ace Aiuppa
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To effectively run a small business that sells physical products, one of your most important tasks is managing those products. Without a handle on your inventory, you risk losing money. Effective inventory management ensures that you always have enough merchandise to satisfy your customers.

Trouble comes calling when your inventory doesn't meet the demands of your business. This can mean that you don't have enough inventory and must turn away customers and their business. Or maybe you have too much stock of certain items that you find difficult to sell. That ties up funds and wastes precious storage space. Either scenario leads to lost income for your business.

What Is Inventory Management?

Also known as inventory control, inventory management refers to keeping track of your stocked goods. This involves having a record of how many items you have, including applicable information such as size, color, weight, dimensions, and where the item is stored (if you have more than one physical location.)

The purpose of inventory management is to help you manage sales. When you know what is in stock, you know what products to promote with customers. Inventory control ensures that you know when it's time to replenish and replace products so that business continues to run smoothly.

The Benefits of Inventory Management

While it does take extra attention to the details of effectively managing your inventory, doing so can mean the difference between profitability or cash flow problems. Inventory control saves your company money.

Reduce Waste

Inventory control ensures that you avoid waste. If you sell products with an expiration date, your inventory control must be effective to avoid unnecessary spoilage.

Avoid Dead Stock

Controlling inventory avoids what is known as dead stock. These items can't be sold because they've gone out of season or out of style or have somehow become obsolete. Think of the poor business owner sitting on a warehouse full of unsold floppy disks or bell-bottom trousers.

Save on Storage

Managing company inventory saves on storage costs. Avoiding excess inventory frees up space needed for products that sell regularly.

Steps to Inventory Management

A successful and effective inventory management strategy is multifaceted. Keeping track of your inventory and effectively managing it takes several processes and procedures, as well as good inventory management software. To manage your inventory, keep the following in mind.

Set Par Levels

Par levels are the minimum amount of a product you should always have on hand, according to your sales patterns. When inventory gets near par level, an inventory system will create an alert that will initiate restocking.

Par levels may change over time, so this isn't a set-it-and-forget-it procedure. Revisit par levels several times a year to ensure that they still make sense for the product. You might want to change par levels during the holiday season. Or you may have to change par levels each quarter.

Prioritize Inventory

Prioritizing inventory is a good practice that ensures you never run out of your most sold products. This does double duty by showing you which of your products are bestsellers and deserve your attention.

You can group your inventory into A, B, and C groups. Group A usually consists of items that are more expensive and that you need fewer of. Group B refers to items that are moderately priced and sell steadily and slowly. C group items are those that turn over quickly and cost the least.

Another method of prioritizing is using the 80/20 rule. This refers to 80 percent of your profits coming from 20 percent of your stock. When you know what your top-selling items are, you can prioritize managing this group and ensuring you stay well stocked.

Pinpoint Low-Turn Stock

Just as you want to know which products are selling well, you also want to stay informed about products that are slow to turnover. When you identify stock that hasn't moved in the last six to 12 months, it may be time to stop stocking the item and discontinue it. You can clear inventory by running a discount promotion to get rid of the items, freeing up storage space for things that sell.

Use the FIFO Method

FIFO (first in, first out) ensures that you get products out in the order you made or bought them. Selling the first things first helps ensure that you move products before they expire.

Of course, this is a vital practice for perishable items, but it's also a smart idea for nonperishable goods, as you want to sell items while they are still desirable to your customers. Trends change, tech improves, even packaging may become outdated. That makes selling older items more difficult in the future. Products also tend to accumulate damage when they sit around for too long.

Consider Order Fulfillment

If managing inventory and shipping is something you'd rather not spend your time on, it's possible to have a third party do your fulfillment. This way you don't need to keep the products you sell on premises. Also known as dropshipping, order fulfillment means a third party handles storage and shipping. All you need to worry about is marketing. Dropshipping is generally only possible if you run an online company.

Use Inventory Management Software

Your best bet for implementing an effective inventory control system is to use inventory management software. Such software automatically keeps track of your stock for you. Software that has real-time sales analytics is ideal. That way, products are updated whenever you make a sale. Your stock levels are automatically adjusted, allowing you to keep an eye on your inventory.

Audit Stock Periodically

Even if you use inventory management software, it's still advisable to do a regular physical inventory. This means counting how much you have in stock of each product, as well as noting product specifics. Many brick-and-mortar establishments do a year or quarter-end inventory that they compare to their current records to ensure there aren't any discrepancies.

Track Products

Having detailed reports of what you sell every day is another vital step in managing inventory. You can use this information to analyze trends with your business. By tracking products and examining those patterns, you can react quickly when you see a trend coming (or going). Tracking products allows you to see the big picture, which is helpful in long-range forecasting and planning.

Managing inventory is an important task that directly affects sales. Developing an effective inventory management system is your best bet for ensuring that your company runs smoothly and successfully.

At Swyft Filings, we know that running a successful business takes keeping your eye on many administrative tasks, in addition to development and sales. We've answered your questions about inventory and more in The Ultimate Guide to Starting Your Business. Download this comprehensive guide for free today.

Originally published on October 21, 2022, and last edited on May 23, 2023.

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