Inventory management for small businesses: Ultimate Guide (2024)

Why is inventory management important for small businesses, what are the benefits, and how can you improve it? Read on to learn more.


In today's world, it has become extremely important to take effective actions in whatever field or sector it may be. Strategic planning and effective organisation in work processes have become more common. In the field of business and commerce, one of the main part in the entire process of planning is the handling of the goods and services. Whether the products are in the storages or whether they are delivered to the customers, proper tracking is extremely important to prevent unnecessary expenditure and to prevent loss of goods. For these to take place, inventory management services and applications have come up which enables a more effective process of data collection about the different aspects involved around the goods.

What is Inventory Management?

Inventory management is the part of supply chain management that aims at having the right products in the right quantity for sale, at the right point in time. When inventory management is done effectively, businesses can easily reduce the costs of carrying excess inventory while maximizing returns and sales. Good inventory management can help one track the inventory in real-time to streamline the process. 

Why is Inventory Management for small businesses so important?

Businesses need to track inventory so that it helps them to manage costs and expenditures and also ensure that they have an ample supply of products to meet the demands of the customers. Effective inventory management allows businesses to save money and improve cash flow. 

What does effective Inventory Management for small businesses look like?

Three steps help to manage the inventory. These are listed below:

Step 1: Organising and tracking inventory.

One can never manage the inventory if one cannot track it. The steps to make sure that the inventory data is accurate and up to date are listed below:

  • Setting up an inventory ledger

The most basic method of tracking inventory is by setting up a manual inventory or sales ledger. One can do this with the help of most accounting software, a spreadsheet, or even with the help of a physical notebook. One can make a sale or a purchase and can record it in the ledger. 

  • Setting up a point-of-sale (POS) system

 A good POS system helps in accessing a barcode scanner, processing debit/credit card payments, printing receipts, and making the entire checkout process easier for a huge amount of customers. 

  • Getting barcode labels

 Scanning products into the sales and inventory ledgers automatically using a barcode scanner can help to speed up the checkout process and this also helps to cut down errors, and make the inventory tracking system more automatic.

  • Periodically auditing the stocks 

One can use software and label scanners to track the inventory but one must occasionally count it manually to check if it matches what the inventory tracking software says.  This also applies to businesses that sell non-perishable goods. 

Step 2: Deciding when to order more

The list of few techniques that can help to make the inventory purchase easier are listed below:

  • Looking at the historical sales to get a sense of demand

One should start noticing the patterns present in the sales data. One might find that certain products sell better at a certain time of the week, month or year. One can analyze the patterns and try to predict future changes in demand and this is one of the simplest ways to avoid all sorts of mistakes in making an inventory purchase.

  • Prioritizing the stocks present 

 Most retailers can sort their products into two categories — high-margin products with unpredictable sales, and low-margin products with high-frequency sales. Products belonging to the first category need more attention than the latter. 

  • Adopting just-in-time purchasing

In a just-in-time system, the supplier is only allowed to produce exactly the required amount of stock that is needed to fill the customer's orders and not more than that. A just-in-time system prevents the need for holding the inventory or performing any kind of inventory management system in the first place, which helps potentially save a lot of time and money. 

  • Using purchase orders

Purchase Orders or POs are a great way to make sure that one and one's suppliers are always on the same page. Purchase orders include important information like the purchase order number, purchase order date, vendor's name and address, buyer's name and address, delivery date, shipping method, item name, item description and technical information, and so on. 

Step 3: Minimising costs and preparing for the future

Good inventory management helps to cut down supply chain costs, get a better price of exchange from the suppliers, and eliminate the need for inventory management. The more information that one share with the suppliers, the more one can help to plan, reduce safety stocks, and save on inventory costs. Suppliers are trying to cut down on uncertainty and prepare for unexpected events just like they are. 

  • Considering a dropshipping system

Dropshipping means that the suppliers ship their goods directly to the customers and they bypass the need for inventory management systems. Under a dropshipping arrangement, the supplier ships the goods directly to the customer's doorstep instead of the goods getting delivered to the required location from one's warehouse. 

How to improve your inventory management process?

One can improve the inventory management processes by the methods that are listed below.

Projecting accurate sales numbers.

The amount of inventory that one keeps in hand is related to the amount that one expects to sell and the time interval within which they are to be sold. If one has an established business, one can use the history of sales and growth of the projections to determine how much inventory one should have in stock when one needs to reorder each piece. One should pay attention to the bestselling items.

Appointing a warehouse manager.

A warehouse manager oversees the daily operations of a warehouse and ensures that all the onsite workers are regularly updating the software systems and sticking to the company policy. This includes the scanning of the products in and out of the locations when they arrive for delivery. The warehouse manager also ensures that there are quality assurance checks and regular inventory audits are performed as it is already planned.

Establishing regular inventory cycle counts.

While the inventory is in storage, it is extremely important to regularly take account of the stock of the products that one has in hand. Regular inventory auditing is extremely critical to keep the percentage of the vanishing of goods as low as possible.

Implementing a tracking system

It is extremely effective to use an inventory management system that is in the form of sophisticated software that can help to automatically update the inventory in real-time by scanning the items and their locations around the storage facilities.

Benefits of inventory management for businesses

An effective inventory management process can prevent these issues and offer the list of benefits that are listed below.

Traceability of the inventory

Inventory management includes knowing when a supplier has shipped the goods when the goods arrive at the storage facility, where the goods are moved to within the facility, and when the goods have been shipped out of the facility to a buyer. 

Prevention of losses

A major issue for the warehouses is the loss or theft of products which is known as inventory shrinkage, especially when the inventory management controls are not in a suitable place. Without the help of regular inventory audits, the items can go easily missing for months, and one can have no idea about this. A regular cycle count should be incorporated into the inventory management process to enable the confirmation of the accuracy of tracking the information listed in the inventory management system. 

Higher customer satisfaction

Customers, today, generally expect a rapid fulfillment of orders, especially when they are ordering products online. An effective inventory management process ensures that the products are always in stock and that they can easily be located and can be sent out for delivery. This, in turn, boosts customer satisfaction.

Consistent inventory levels

An effective inventory management process helps one with the appropriate controls over the inventory, thereby, letting one know the exact time to reorder the products. Inventory management systems can be set up to automatically reorder the products from the suppliers when there is a minimum quantity of the product in the warehouse or the storage. 

Tips for small businesses Inventory Management ( Importance of using mobile applications)

One can invest in Inventory Management software. Businesses generally use inventory management software for managing and optimizing supply chains. Investing in the right inventory management software helps in providing accurate, up-to-date information that helps one to make critical purchasing decisions, such as when to replenish the stocks and which vendors to be used. Effective inventory management is generally essential for businesses of any size. Businesses can also save time and money and aim at maximizing their sales with an advanced inventory management system. 

Frequenthy Asked Questions

1) How do small businesses record and manage inventory?

Small businesses organize their inventory based on their use under the categories of inventory used in the production process, inventory purchased by consumers, and inventory used in the daily operation of businesses or supplies. Inventory should be stored in warehouses and organized to help in ensuring ease of access along with minimizing the effort. 

2) How do you manage your inventory effectively?

Effective inventory management requires the combination of the right technologies, the right policies, procedures, and processes, and also the help of well-trained staff who follow consistent and morally correct processes for receiving and managing the raw materials and processing the orders. The inventory management process begins while receiving the items into the inventory and also ensure a consistent process for removing the items from the inventory, managing waste and continually monitoring the usual stocking levels.

3) What are the 4 types of inventory?

The four types of inventories are the inventory for raw materials and components, inventory for finished goods, inventory for work-in-progress, and inventory for MRO (maintenance, repair, and operating supplies) goods. Raw materials and components are the inputs that are necessary to make the products that the company sells. Finished goods are the goods that are available for selling to customers. Work-in-progress goods are the goods that are manufactured. MRO goods are the goods that run the business operations such as the supplies.

4) What are the 3 major inventory management techniques?

The three inventory management techniques include the pull strategy, the push strategy, and the just-in-time (JIT) strategy. The pull strategy is based on the demands of the consumers. The push strategy is based on the expected or predicted demand for goods. The just-in-time strategy helps to produce the products at the time when they are ordered. These strategies that are used vary by the industry, type of business, and the strategies that are implemented.

5) Why aren't spreadsheets for inventory management?

Spreadsheets are not an effective inventory management tool because they have to be updated manually, which is a time-consuming affair and this means that the data is almost always out of date. Spreadsheets cannot scale with the business, cannot communicate with the POS, and do not show the way the products are being sold. Also, spreadsheets are inadequate for managing inventory. They are subjected to frequent errors and are not sophisticated enough to automate the various aspects of the inventory processes that help one to ensure optimum time and provide up-to-the-minute reporting of real-time and location of the products.

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