Many small businesses struggle to have effective inventory management. Having a good balance between having the right amount in stock at the right time and going overstock or suffering stock shortages can be complicated. 

The best inventory management strategies will stabilize supplies with minimal storage needs. It's crucial to quickly fulfill customer orders, prevent loss of items, and know when and what you need to buy. 

There isn’t any business that will grow without good inventory management. So, we will take a look at the best practices that will help you with your small business inventory management.

Inventory management is the process by which a business manages its physical stock, controlling the flow of the products. This process includes tracking inventory, fulfilling sales in a proper manner, and picking when to submit purchase orders. 

The nature of a business inventory management is directed by the type of inventory it requires. That being said, there are a few things that one needs to consider to do an effective inventory management process:

• Location: Depending on the business you are running, consider if you can store your inventory in a physical retail facility (for retail businesses) or if you need to rent a warehouse.
• Quantity: An accurate forecasting of sales will help to understand how much you need to purchase and maintain for any of your products with proper inventory control. You want to hold your stock levels in a good balance. You'll want to avoid excess inventory, while at the same time, you want always to have enough to fulfill any sale quickly.
• Method: It isn't only about where you store and receive stock. Inventory management includes ensuring that locations are clean, setting up aisles and bins, and establishing an efficient process of quality control to guarantee that all products delivered by suppliers are in condition to be sold.

Inventory management is a crucial part of supply chain management, but both have different meanings. 

Supply chain management looks at the flow of products from raw materials and sourcing to the final distribution. Inventory management, however, deals with receiving, controlling, and depositing the products you hold; and provides data for informed purchasing. 

For a small business owner, both procedures can easily meld together. But it is important to know the differences as you begin delegating inventory or supply chain tasks to your staff or outside contractors.

Inventory management is crucial to business profitability and scalability. Without a proper inventory management process, many businesses will find themselves wasting money on products they can't sell. These may include older stock, running out of stock in other areas, having delays that will upset customers, and losing valuable items. 

These issues will directly damage the profit margins. Implementing some of the inventory management processes that we will see later will prevent these problems and give some additional benefits to your business.

Inventory Tracking

It all begins with the objective of knowing where the product is at all times. This checks on when the supplier delivered the goods, when they arrived at your storage, where these goods were moved within the facility, and when they were sold. 

It doesn't matter which of the many inventory management systems you use. All of them should be able to track the items to the specific location in the warehouse. This is the main task of a warehouse manager, who has to keep an eye open for anything that comes and goes, and where the items are located. 

Prevent Inventory Items Loss

Inventory shrinkage is the loss or theft of products and is a major issue in warehouses, especially if you don't track inventory properly. Items can go missing even for months without periodic audits. 

A regular cycle count will help you confirm the accuracy of the information listed in your inventory management system. It will prevent the loss of any item, and the warehouse manager can quickly confirm that all inventory is in the right place at any given time.

Consistent Inventory Levels and Customer Demand

A proper inventory management system will let you know when it is time to re-order products. It is based on how quickly you sold a particular item, but once you have the market and historical data, you can clearly determine when you should replenish stock.

Some systems can be set up to automatically re-order materials from the supplier when you are down your minimum quantity. However, you should consider ordering the goods manually, even more if you are a small business owner.

Meanwhile, if you manage inventory effectively, you will boost customer satisfaction as you ensure that your products are always available. Pickers can locate them quickly and send them out for delivery.

You should follow several steps to manage inventory and ensure supply chain efficiency.

Record Your Inventory

One of the most basic methods to keep track of your store inventory is to manually set up an inventory or sales ledger. You can do it with inventory management software, using a spreadsheet program, or simply writing it down on paper. But anytime you make a purchase or a sale, record it into the ledger so you can use those numbers to update your total inventory at the end of the day. 

This could be useful for small businesses, but once you are dealing with high demand and inventory levels, you won't be able to do it manually, and perhaps you will need the right inventory management software to perform such a task. 

Either way, a good sales or inventory ledger must have the next data recorded for each product:

• Name
• Date of purchase or sale
• Description of the transaction
• Quantity
• Price per Unit
• Total price paid
• Total amount purchased
• Total owed

Ensure Inventory Control Periodically

Even if your business utilizes software to automatically keep track of your inventory and each of the products that come and go, you need to occasionally do manual control of the inventory and check that your software is in line with reality.

There are three different ways that you can use it:

• End-Year Inventory: You will have to go through your inventory manually, checking every item and ensuring the numbers in your records match what is in stock. It is recommended to schedule this procedure ahead of time, as it is a long and tedious task, and preferably at the end of the year when your accountant may need a precise inventory evaluation. 
• Cycle Counts: You can spread the audit throughout the year and do it one product type at a time. Typically, you perform them regularly (X product each Tuesday of the week, for example), but one of the best practices is to do it daily. However, without the staff or technology to perform it this way, this task would be impossible. You should schedule the cycle counts based on how fast you move through the inventory, counting first all the items that sell fast.
• Spot Checks: These counts involve picking a product at random and ensuring that the reported stock matches the actual. You should focus your spot checks on your most expensive items and the fast-selling products.

Accurately Forecast Demand

Once your business has been active for a few months, you should notice some patterns in the sales data. 

Checking your inventory data will help you to identify these patterns and try to predict changes in future demand, mitigating mistakes in inventory purchasing. Leveraging data analysis, you will be able to see which was the busiest week of the year when you usually run out of your top products, what will be seasonal highs and lows for the next year, and other sorts of data that may help your business in the future.

Prioritize Your Products to Optimize Stock Efficiency

Separate your low-priority stock from high-priority items and determine which need the most of your attention. 

It usually is sorted into two categories: "High margin products with unpredictable sales" and "Low margin products with high-frequency sales." Ideally, you should check more the first ones, as getting the inventory wrong has a bigger impact on your business. 

If things are getting out of hand on managing the inventory, you should consider implementing a just-in-time system, where your supplier will only produce exactly the amount that is needed, and no more. This system gets rid of the need to hold inventory and any kind of inventory management system, saving a lot of time and money. 

Ecommerce businesses usually use the just-in-time system as it decreases the inventory and any sort of issue that may come with it. But it harms suppliers as they are unpredictable, expensive, and time-consuming to set up. You must have an agile supply chain model. Otherwise, a single delay will endanger the whole process and shut everything down.

Implement Purchase Orders

Many businesses purchase inventory by calling the supplier, transferring the payment, and just waiting until it arrives. But as the business grows, you'll need to organize this aspect better. 

A purchase order makes sure that you and the supplier are always on the same page. It's a way to ensure that everything is as purchased. If anything is missing, you can use this document to corroborate it. Most companies write down their purchase orders electronically using a POS system or any other sort of software. Otherwise, you can try the Shopify free template to make your own orders. 

Lastly, there are several pieces of information that a purchase order must have:

• Order number
• Order date
• Vendor name and address
• Buyer name and address
• Delivery date
• Shipping method
• Item name, quantity, unit cost, and description
• Additional taxes
• Total price
• Payment information

You can implement several techniques to improve your small business inventory management.

ABC Analysis

It helps you to properly analyze costs, separating the products that are more profitable and the most costly into three categories. 

• A: These items are the most valuable and cost the least to store in the long term. 
• B: These products are in the middle of the road. They are important sales to make, but not as big as the first category.
• C: These products tend to be small-ticket but with high turnover. High volumes of these product sales are critical to profitability.

FIFO and LIFO

These are accounting methods based on how products move through your facility. 

"First In, First Out" (FIFO) is a useful system that sells the oldest inventory first. The first products that came to the warehouse were also the first to be out the door. It keeps the inventory fresh, which is crucial for expiring or perishable goods.

The "Last In, First Out" (LIFO) system makes sure that the most recently received inventory will be the last to be delivered. It's useful for products that aren't perishable. This accounting method report has some potential tax advantages.

Minimum Order Quantity and Economic Order Quantity

These are two different methods to determine when to re-order materials.

"Minimum Order Quantity" (MOQ) maintains the minimum amount of each product type a seller is willing to fulfill. Low-cost products often have a higher MOQ, while high-cost items tend to have a lower MOQ. It's recommended to consider a supplier's MOQ for a certain product against your own sales projections.

"Economic Order Quantity" (EOQ) is commonly used by manufacturers who have to consider variable costs like raw materials, fluctuating demand, and production. It keeps the inventory costs down by purchasing the most amount possible of multiple items, minimizing the need to re-order them individually. 

Safety Stock Inventory

It is the extra inventory you order beyond what would be your demand. It is useful to have some extra units than expected if you anticipate that a certain item will continue to be a hot seller. 

Safety stock is tied up with your sales projections. If you forecast trends that may happen in the future days, it would help to have some more, especially for your bestselling or essential products.

Drop-Shipping

This method has the supplier ship the products directly to your customer once you receive the order. It cuts out the need for a warehouse or keeping your inventory at immediate disposal. 

It is helpful for rare orders or products that you can't simply store in your facility. This method is also used by ecommerce and online businesses, as we stated before. 

Cross-Docking

The cross-docking method increases supply chain efficiency with the delivery trucks unloading directly to your trucks, which will ship your sales out to the customers. 

It bypasses the inventory management process, with the items going out as you receive them. It is a useful method for items planned for just-in-time shipping.

You can use any inventory management software or POS system, as there is plenty to test. Or you can go with something simpler, utilizing the Microsoft spreadsheet program Excel. 

You will find many free templates that are compatible with Excel for a more manual check of your inventory (and easy to learn), which will be fine for your small business. And if you need a CD key to get Microsoft Excel, you can get one at a low price in RoyalCDKeys. It comes with the Office 2021 whole package, so you won’t only get just Excel.

Stock Inventory Control Template

If you are managing stock for a retail business or materials to be used for a manufacturer, it is crucial for you to have efficient inventory management. 

With this template, you can identify when it's time to re-order stock, access supplier information, reduce excess inventory, and easily locate items in storage. You can download it for free from Smartsheet.

Equipment Inventory Template

If you are using costly equipment, you can use this template to keep track of the value and condition of such equipment and where it is located in the facility. 

Having all this data accessible will help you know when it's time for an upgrade, which items are the most used, where they are being stored, and which are the most expensive. You can download it for free from Smartsheet.

Food Inventory Template

This template is specifically designed for restaurants and any sort of business dealing with food. Restaurants can organize their inventory based on types of food and easily view the current quantity of food costs and inventory costs. You can download it for free from Smartsheet.

An efficient inventory management system will boost your sales and drastically improve your business. Knowing how much stock would be necessary for certain situations will prevent you from being out-of-stock without satisfying all of your customers or having an excess that you can't get rid of by just selling it.