INVENTORY MANAGEMENT   |   7 minute read

15 inventory optimization techniques that will transform your business

Heather Smith, author of “Xero for Dummies” is back with more insights from industry experts. This time, she interviews top accountants and CEOs for quick and easy tips to change the way you manage your inventory.

For businesses carrying inventory, understanding and effectively managing their inventory is vital to ensure optimum profitability and cash flow within the business. Here are 15 techniques you can use in your own small business, or the businesses you advise to:

1. Adopt a connected cloud-based business management platform with real-time analytics.

An optimal solution minimises data entry and enables the flow of accurate inventory financial information – from the store clerk, through to the purchasing officer, and across to management. This ensures everyone is able to make informed decisions in a timely manner.

I see many businesses, knowingly or unknowingly, have thousands of dollars locked up in unsold product on their shelves, money that most small businesses can ill afford. An inventory management system that gave reports and other management advice to the owners in real time would be invaluable – for both the owners and for me as an advisor – as the system would provide answers to questions that the client never knew existed. It would present options for strategies like a Just In Time ordering process, matching the holding of the inventory with appropriate funding (whether from working capital, debtor financing or taking advantage of supplier trading terms, or otherwise). It’s one thing to aim to sell more of what you have to sell, but you also need to know how much it is really costing you in attempting to sell more!

- Chris Wheatley, Director, Scope Accounting

2. Update inventory records promptly, so all key staff have access to timely information, and inventory can be managed and re-stocked accordingly.

To stay competitive, businesses need to make decisions fast, and have access to reliable information.

Information is key. One option is tracking when the last time an item sold – it may be last year’s colour or an odd size [and] there is no point having stock sitting on your shelf gathering dust! It may be more beneficial to sell the item (and that may be at a loss) and use the cash for something different – for example, buying a different stock item that you can sell. You also need to think about other costs, such as rent. I’ve seen people rent a bigger building just to hold old stock. Crazy! Wiggle ( do something really smart to shift old stock – at midnight, the sale price drops by 1%, and continues to do so every day until sold.

-Jonathan Gaunt, Managing Director, FD-WORKS


3. Split inventory into different categories and analyse categories separately.

The most basic step a business owner can take to improve inventory management is to divide inventory into groups based on how fast it (the product) turns, profitability/etc and analyze.

-Dan Schmidt, founder and CEO, The Emerging Business CFO

4. Maintain an active working relationship with suppliers.

Suppliers are a partner in your business, and open lines of communication help your business provide goods to your clients at the price and time frame they desire. For instance, a supplier you have a good relationship with may proactively notify you of potential shortages and work with you to devise workarounds to meet customers’ demands, such as liaising with a competitor or seeking different sources. A current trend encourages people to buy products made in their own country, so as a business you may find yourself working with suppliers to source local products. Your discussions shouldn’t just about getting the lowest price; you also need to build a long-term, open relationship.

5. Establish the ability to monitor all aspects of the inventory.

Put a connected system in place that adjusts stock levels directly from your sales channels. By doing so, you can get excellent visibility into what's selling well, what isn't and the corresponding margins that come along with it in order to shape future decision making.

- Ryan Lazanis, Xen Master, Xen Accounting

6. Utilise mobile devices where possible.

Train staff on using mobile devices, such as iPads or barcode scanners, so stock movements can be tracked and, in turn, financial records updated in real time. This avoids the drudgery of updating paper stock reports, minimising mistakes and wasted admin time. It’s also good practice to ensure mobile devices are adequate for the task at hand, charging stations are available, and security measures in place to avoid theft of the devices.


7. Deal with slow-moving items to ensure they don’t become technologically obsolete, pass their use-by date, or carry a value that’s greater than what they can be sold for.

Inflation or changes in currency value can affect the perceived sales value of the product, in both directions.

Consider the age of your inventory! Try to think of inventive ways to sell older inventory, such as heavily discounting. The cost value of your inventory may not be recoverable, particularly when the items have been held for a long period of time, so it is crucial to keep the inventory age as young as possible.

-Tracey Newman, Director, CloudCounting Pty Ltd

8. Plan an optimal warehouse layout that suits your inventory.

Restructure your warehouse so that fast-moving items are closest to the fulfilment area, and put them on flow racks or other high-accessibility storage solutions – not just boxes or pallets on racks. You could even consider implementing a barcode scanning system to improve efficiencies on handling and fulfilment.

-Dan Schmidt, founder and CEO, The Emerging Business CFO

9. Establish re-order quantities and have low-stocks alerts in place.

Assess whether these levels work for your business, and adjust as necessary. Never running out of stock may indicate you’re holding too much stock, while running out of stock may mean you don’t have stock available to meet customer requirements. Be clear on who is responsible for re-ordering inventory.

I don't believe that enough small businesses put appropriate systems in place to manage inventory. They spend most of their time manually managing their inventory and not enough time on strategic decision-making in that regard. Re-order quantities and low-stock alerts are both important, but forecasting inventory needs is even more critical.

-Andrew Mobbs, Managing Director, The Hatchery Limited 

10. Cultivate open lines of communication internally.

For instance, if a big or unusual sales order is in the pipeline, ensure the sales team have processes in place to notify the purchasing officer and others involved in inventory management. The purchasing department may need to proactively talk with suppliers, for example, or train additional staff and free up space in the warehouse, in anticipation of the order.


11. Plan for the future.

If your current inventory management processes cannot cope with the business growth, they will be a painful bottleneck in your inventory cycle. You need to start preparing now to adopt a solution that can handle your business evolution.

The biggest challenge I have experienced in working for small businesses is prioritising the time of the founders and key staff over the short-term cash flow hit that a business may take from implementing a robust and useful inventory management system. Excel is a really cost-effective way of managing inventory, but it comes at a high price in the time small business owners spend reconciling and managing their stock – time they should be spending selling or planning for growth.

-Andrew Mobbs, Managing Director, The Hatchery Limited

12. Share relevant inventory data, in digestible format, with the business team so they have a holistic understanding of what is happening in the business.

While they have their own role and responsibilities, this knowledge assists them in understanding what the business does, where they fit in the business, and how they can help business sales growth.

13. Maintain up-to-date stock levels, so inventory can be managed in a timely manner, and restocked as necessary.

Ensure the chosen accounting system has the ability to run a perpetual inventory management system and the business owner should get very familiar with running inventory value reports! A perpetual inventory system means that the accounting system can provide a list, at any given point in time, of the quantity and cost of each item code.

-Tracey Newman, Director, CloudCounting Pty Ltd

14. Store inventory safely and securely.

It’s important to house inventory in a safe and secure environment, because we must ensure our products are kept in best possible condition and ready for sale. It is imperative that packaging does not look damaged prior to sending to customers as it instantly raises questions on the quality of the products. This is also applicable to the food products we sell, and these items also involve the added requirement of ensuring they are not exposed to unnecessary heat or extensive sunlight. Lastly, security is always at the top of my mind as you don't want to lose any stock due to poor storage conditions – after all, no stock, no sale.

-Laurena Reisman, founder, Mishy Moo Pets

15. Undertake an annual full inventory stocktake, and conduct regular spot-check counts of inventory.

Most inventory systems have the ability to group inventory items (for example, bearings, bolts and so on). This way, a stock count sheet can be printed on just one group of items, and the business owner can cycle through, conducting counts using small, manageable reports that will not take up days and days of effort. Many business owners find inventory counts such a big task they don’t get done. By making the count smaller, there is a better chance of accomplishing the task. If a discrepancy is identified between the actual count and the system generated quantity, consider why. This could be due to a clerical error of using the wrong item code when buying or selling, or something more sinister such as theft by an employee.

-Tracey Newman, Director, CloudCounting Pty Ltd

It’s important for business cash flow that businesses maximise the profit they can generate from stock, and move stock in a timely manner. Utilising these 15 techniques will assist the business in optimally managing their inventory.

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