Small Business Inventory Management | 3 mins read

Small Business Inventory Management- 3 Key Steps

small business inventory management 3 key steps
Chloe Henderson

By Chloe Henderson

Small businesses have to consider several elements when it comes to managing inventory, such as choosing what product lines to carry and where to source items.

With small business inventory management, startups can gain a better handle on where, how, and when to replenish products to meet customer demand and limit excess expenses.

What is Inventory Management?

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Inventory management is the practice of gathering insightful information from inventory data to optimize stock levels, organization, and usage. While many businesses believe inventory management requires complex analytics, companies just need to implement a consistent management system.

Most inventory management solutions automatically collect and analyze information, eliminating the need for manual calculations. Proper management enables businesses to efficiently track sales, shipments, deliveries, and order fulfillment. This gives managers insight into the inventory turnover, areas of high demand, and average order quantity for each item.

By collecting inventory data, companies can forecast future sales, demand, and staffing needs to optimize production, shipments, and internal processes. This enables businesses to drive sales, reduce inventory expenses, and boost profitability.

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Practicing inventory management also improves-

  • Customer Service - An adequate inventory management system can track stock levels in real-time to avoid stockouts and backorders, which can significantly impact customer satisfaction. Businesses can monitor orders to better forecast future demand and prevent understocking certain products.
  • Theft Control - Theft control is especially crucial for small businesses as they begin onboarding employees. Inventory management solutions track product movement through the supply chain, as well as employee activities, to enforce accountability and prevent internal theft.
  • Financial Management - By automatically recording transactions, companies can improve their bookkeeping and forecasting abilities to better manage their financials. Inventory management and forecasting software can monitor the cost of acquiring stock, shipments, gas, and restocking to determine where the business can reduce spending.
  • Supply and Demand - By tracking the constant tug of supply and demand, managers can determine which items should be discontinued to create a balance.
  • Product Tracking - Product tracking enables managers to prioritize shipments based on demand to boost sales and profits.

3 Steps to Successful Inventory Management

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While inventory management may include unique elements for different industries, every business must follow the three key steps.

1. Organize and Track Inventory

It is impossible to properly manage inventory without a digital tracking solution. Companies can organize and actively monitor their products by-

Setting Up an Inventory Ledger

Manual bookkeeping is the traditional and bare minimum tracking method a small business can use to manage inventory. Whether using a digital spreadsheet or paper and pen, managers should record all-

  • Transactions
  • Product Names
  • Date of Sale or Stock Purchase
  • Order Quantity
  • Unit Price
  • Total Amount Paid
  • Total Owed
  • Transaction Description

While manual recordkeeping may be a good starting point for startups with small inventories, businesses with more products and higher order volumes need a more sophisticated management method.
Implementing Point-of-Sale and Forecasting Software

Point-of-sale (POS) software automatically updates stock levels with every transaction and purchase order. POS systems also process multiple payment forms, from cash to credit cards, to track sales, income, and profit. With this functionality, businesses can streamline the transaction process while collecting vital customer and inventory data.

Companies can also implement forecasting software to further analyze inventory data. Forecasting solutions detect patterns from historical and real-time information to project future outcomes, such as customer demand and staffing needs. This enables inventory managers to change orders to capitalize on increasing demand.

Forecasting software can also alert management when demand is expected to decrease, enabling the business to reduce inventory expenses and preserve the bottom line.

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Using Barcodes

By implementing barcodes, companies can automate cycle counts, transactions, restocks, and order fulfillment, minimizing human error and improving order accuracy. Once an item is scanned, the product information is uploaded to all integrated systems, keeping all records up to date.

Conducting Audits

Regardless of whether a business uses manual or automated inventory management, managers should perform routine audits to ensure accurate records. Audits are typically performed one of three ways-

  • A Full Year-End Count - Companies can manually go through each unit at the end of the year to cross-examine inventory records. However, this method is time-consuming and should only be used for businesses with limited stock.
  • Cycle Counting - Cycle counts are tallies performed in increments throughout the year to avoid an extended process at the end of the year. This is done by choosing different product lines to count each month.

  • Spot Checks - If discrepancies occur even after cycle counts or the year-end count, businesses can choose to spot check inventory. Spot checks pick a product line at random to count, often focusing on items with high turnover.

2. Determine Reorder Points

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Small businesses working on building a loyal customer base need to calculate reorder points to keep stock at healthy levels. To gain a better sense of inventory usage and replenishment, companies should consider-

Historical Demand Trends

With forecasting software, businesses can detect demand trends from past transactions. These patterns can help determine-

  • Peak Seasons
  • Slow Months
  • Slow/Fast Moving Inventory

  • Future Demand Trends
  • Busiest Times of the Day

By referencing past demand trends, companies can optimize their inventory management to minimize stock costs and promote profits.

Periodic Automatic Replenishment

Periodic automatic replenishment (PAR) refers to the minimum and maximum stock levels a company should keep of each product. These levels should be calculated for each item individually, as it directly depends on the product's individual turnover rate, lead times, and demand.

By using PAR, companies do not have to worry about under and overstocking products, ensuring they can fulfill all customer orders.

3. Reduce Stock Expenses

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Inventory management also helps to reduce unnecessary inventory expenses through optimization. By cutting down excessive supply chain costs, companies can boost their bottom line.

The best way to reduce stock expenses is by developing strong relationships with suppliers. Creating symbiotic relationships with vendors gives companies access to exclusive deals and reliable resources.
In order to build a strong supplier network, businesses need to-

  • Create an Open Line of Communication - Establishing an open dialogue with suppliers ensures that all parties are on the same page and understand what is expected of them. Poor communication can lead to missed deadlines, incorrect contracts, and upset clients.
  • Include Suppliers in Decision-Making - The more a business includes its vendors in decision-making, the more they are able to prevent supply chain disruptions. Therefore, the company can avoid potential stockouts and unexpected price increases.
  • Earn Their Trust - Most vendors will only enter a long-term agreement with a company they know and trust. By making payments on time and out-of-pocket, rather than relying on credit, businesses can show vendors their reliability and financial stability.

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