Small Businesses Inventory Management: Getting Started!

Keeping track of inventory, updating it, and using that data to track profits, needs, and sales is a crucial part of any company, but for a small business, inventory software can make or break your ability to keep up with sales and demand. While that might sound a little doom and gloom, there comes a point in every business lifecycle where inventory management becomes a necessity.

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Whether you're managing inventory for your own web shop, or tracking sales and assets across multiple consignment shops and retailers like Amazon or eBay, inventory management helps you to track and control your supply, so that you can optimize your inventory and manage stock without spending more time or money than you have to. While inventory control software can seem intimidating at first, you can get into it fairly easily, especially if you start early.

What is inventory management and why do you need it?

Inventory management is the science of inventory, where you use the information from your inventory sheet to create usable data, but you don't need a mastery of data analytics to make it work, just a little practice. In fact, with a dedicated inventory management system, most of the math is automated. Inventory management helps you track sales, shipments, and production, so you can see which products are selling, where, and in what quantity. (It's science, not magic, we promise!) It allows you to predict your entire supply and demand curve, to adjust shipments and deliveries, or even production, to precisely meet your needs. All of this allows you to reduce inventory costs to improve profitability. It also helps you to reduce costs and headaches related to over and under stocking.

-Customer service - Inventory management is crucial to customer service because it allows you to prevent faux pas such as allowing customers to order products that are no longer in stock. A good inventory management system will also allow you to track production and backorders, so you can tell interested customers when the item will be in stock. Backorders, or orders that are placed while a product is not available for shipment, are also useful for tracking the demand, allowing you to improve the availability of high-demand items. 

-Theft Control - While not always an issue for small businesses, especially those primarily on the web, theft control is important when you start to take on employees or have a physical shop. Inventory management allows you to see the number of products you have at any given time, with the associated revenue made from sales, so it's easy to see when something goes missing. Hopefully that never happens, but it is something to keep in mind.

-Financial Management - Tracking the number of items you sell improves your bookkeeping by automatically logging sales value when you sell a product, costs of acquiring stock, and depending on what you add to your inventory tracking, cost of shipments, gas, and restocking. 

-Supply and Demand - Long term supply and demand data can tell you which products sell, which customers want more of, and which you should discontinue.

-Product Tracking - Product tracking allows you to prioritize your inventory based on high sale items, and those that don't sell at all. This way you can market the items most likely to sell, instead of advertising for those that don't.

A worker operation a forklift - Inventory system for small business

Different Inventory Modules, Methods and Techniques

There are several inventory methods that you can use to track and analyze your production and sales system.  ABC Analysis and cross docking are two of the most common, but there are many solutions that might fit your business better.

-ABC Analysis - This involves dividing products into categories based on sales, to organize items based on their impact, so you increase production of fast moving products, and reduce it for  those that don't. The 80/20 rule, or 80 percent of sales comes from 20 percent of products is often highly accurate, and suggests that focusing your marketing efforts and inventory optimization on those products can boost revenue.

-Cross Docking - Products are either sent directly from your production to your retailers or consignment shops, or directly to customers, to reduce the costs of storage and shipping. You need very good inventory management for this so you don't lose track of shipments or items, but it can reduce costs. 

Check out this great infographic on Inventory Management Techniques.

How to use product management to boost sales and ROI

Product management can boost your sales and ROI (return on investment) when used correctly. By streamlining your process of production, shipping, and sales to ensure that you meet demand without going over, and that you save as much money as possible one very part of delivery, you can boost revenue on products.

-Inventory Analysis - Analyzing your inventory is relatively easy, and you can do it with Excel. The simplest method is organizing products in order of the most sales, which allows you to focus your attention on those products, so you can meet the product demand.

-Inventory Shrinkage - One of the easiest ways small businesses save money with inventory management is through inventory reduction. This is the process of using analytics to determine how much of a product you need at any given time based on previous sales data. Then, you can shrink the amount of surplus inventory that you keep on stock, and supply your consignment shops, shop, or web shop warehouse with the number of products most likely to sell.

Important considerations include that you have to make adjustments for different seasons and sales periods (such as holidays) to appropriately meet demand for that season. Considering social or world events that might make your product sell more quickly during a specific period (I.E. the Super Bowl if you sell football related products) is also crucial to success with inventory shrinkage. The idea of inventory shrinkage is that by bringing in just enough inventory to meet demand, you can reduce costs of purchasing inventory, reduce storage, and therefore save money. It can backfire if you don't supply enough to meet demand, but with a good analytics system, this shouldn't happen. However, if you're paying a great deal for deliveries, it might not be the best way to go. 

Inventory Management for Small Business Operations

There are a number of solutions that you can use to manage your inventory, and choosing the best one depends on your needs, budget, and available time. Inventory management solutions range from Excel spreadsheets to dedicated software, and each has its pros, cons, and uses.

A computer and a laptop: inventory software for small business

Using Excel as a low cost solution for inventory management

If you don't have the budget (or the necessary pain point) for a dedicated inventory management solution, then Excel is a solution for early stage businesses. While it requires a bit more work than using apps and software, you can track and analyze your inventory just like you would with a program, albeit with a bit more headache. Excel inventory management can become overly complicated, or even nightmarish, if you don't organize it or if you have too many products, but it works well for small businesses. With built in formulas, you can automatically tally sales figures, organize based on the number of sold products, or based on sales value to integrate with your accounting and profit/sales reports. Creating running inventory totals, and sales data based on the period is also possible, so long as your Excel inputs are correct.

One easy method for warehouses to incorporate is using a barcode scanner to track incoming and outgoing shipments and packages to automatically log data into your Excel. This reduces human error, but can be difficult and fairly technical to set up. Disadvantages - Excel does have disadvantages, especially when your business starts to expand. But if you have a limited number of products and sales channels, trust yourself to double check figures as you put them in, have the available time, and need something that is simple and cost effective, Excel does the job well.

Check out some of our tips for excel inventory management.

Using dedicated inventory management software for your small business

Dedicated inventory tracking software like TradeGecko will get you over hurdles created by inventory management painpoints. They can also help you grow your business all the way to selling on multiple channels and in different markets. Essentially, if you are spending too much of your time in Excel, or you dread doing weekly stock takes, you might want to consider sacrificing the money to purchase a dedicated inventory management solution. With it, you can wipe out problems like manual errors, double counting errors, and of course, subdue day to day operational painpoints, like matching, or sorting through backorders.

Plus, if you're already using an accounting solution, like Xero or QuickBooks online, inventory management software can plug into them directly, saving precious time on manual accounting. Whether you end up using Excel or a dedicated solution, inventory management is a must. It's also easy to integrate into early stage business, and will help you optimize every stage of production and supply to help your company grow. 

Read next - Introduction to Reorder Point

Inventory System for small businesses

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