Inventory Management for Small Business and Effective Ways to Do It

Sneha Hull | September 13, 2021 | 415 views

How do you know that your business is on the right track to success? Inventory management for small businesses is a critical component of their organization.

Inventory management is a part of supply chain management that encompasses managing inventories, from raw materials to finished goods. It entails the ordering, storage, use, and sale of a business's inventory. Inventory management is fundamentally concerned with having the right products in the right quantities at the correct times.

Inventory management is significant for organizations of all sizes because it identifies what quantities to acquire or create when to replenish inventory, what price to pay, and when and at what price to sell. As a result, effective inventory management minimizes the expense of carrying extra inventory while increasing sales and enables real-time inventory tracking to simplify processes.

Inventory management is accomplished in two ways: through just-in-time (JIT) ordering and through material requirement planning (MRP). However, inventory management techniques are industry-specific.

Here are the most common challenges faced by inventory management for small businesses:
  • Tracking that is inconsistent
  • Inaccurate information
  •  Manual documentation
  •  Unsatisfactory stock
  • The complexity of the supply chain
  •  Access to current stock levels
  • Inadequate management of time and resources

According to the wasp barcode survey, 43% of small businesses either do not track their inventory or do it manually.

"Strapped by tight credit and plummeting sales, businesses have overhauled how they manage supply chains, inventory, production practices, and staffing"

American Economist, Janet Yellen

This blog highlights few basics of inventory management for small businesses and how effectively you can do it with best practices.

Different Types of Inventory Management

How Is Inventory Management Software for Small Business Advantageous?

Inventory management software is a computer-based system that keeps track of stock levels, orders, sales, and delivery. It is the solutions that design the entire journey of your products. From order placement with your vendor through delivery to your customers, the program takes care of everything.

According to softwarepath, inventory management software is used by just 18% of small businesses.
  • The following are some of the advantages of having good inventory management software for small businesses:
  •  Maintain real-time inventory tracking
  •  Prevent shortages of products and manufacturing
  •  Permit simple inventory analysis on any device
  •  Cost savings, improved cash flow, and an increase in your business's bottom line
  •  Assist you in forecasting demand
  •  Prevent overstocking and an abundance of raw materials
  •  Provide rapid and easy bar code scanning to expedite the intake process

Inventory Management Techniques and  Practices

Use the FIFO (First in, first-out) or LIFO (last in, first  out) Approach

Business owners should use a FIFO strategy and sell items in chronological order, starting with the oldest products acquired or manufactured first. Applying this strategy reduces the chances of losing money, which is especially critical for perishable items.

LIFO stands for last in, first out; this method prioritizes  the sale of newer goods or products. LIFO assists in preventing inventory from spoiling. Numerous firms headquartered in the United States have shifted to FIFO and phased out LIFO (last in, first out).

Due to economic changes and the possibility that the  cost of producing items would increase over time, firms  that use FIFO are believed to be more lucrative. FIFO is required to sell perishable commodities, whereas LIFO is  the typical method for non-perishable goods.

This method is a highly beneficial technique of inventory management for small businesses

Optimize Your Forecasts

Among the inventory management strategies available, forecasting is critical. Forecasting accurately is critical, but it is easier said than done. Inventory forecasting is a technique for projecting future inventory levels required to fulfill demand.This is achieved by integrating historical data with future demand cycles and sales trends for individual stock-keeping units (SKU).

Your anticipated sales statistics should be based on a variety of criteria, including past sales figures, historical purchase data, market trends, predicted economic growth promotions, marketing activities, and marketing campaigns, among others.

Learn Your ABC Analysis

ABC assigns a value to each item based on demand, risk, and cost data and then groups them according to those values. This approach assists small business owners in determining which items or services are most critical to the organization's financial  performance and which inventories to prioritize.

ABC analysis is based on Pareto's 80/20 principle; it finds the 20% of items that provide about 80% of value.

The most significant stock-keeping units (SKUs), either in terms of sales volume or profitability, are "Class A" products, followed by "Class B" and "Class C" items.

Below is the description of this distribution applied to inventory:
 A: Items with a high monetary worth (70%) and a limited quantity (10%)
 B: Items of intermediate worth (20%) and mediocre quantity (20%)
 C: Items with a low monetary worth (less than 10%) yet a significant quantity (70%)

Utilize Cloud-Based Inventory Management Software

While cloud inventory management software is a relatively new product, it quickly establishes itself as the best option for organizations. Utilize cloud-based technologies to centrally manage a complex network of interconnected operating parts while minimizing human effort.

Automating a portion or the entirety of the supply chain provides many potential benefits, including increased efficiency and accuracy.

Keep an eye out for software that includes real-time sales metrics. The software communicates directly with your point of sale, ensuring that your stock levels are immediately updated after each transaction. In addition, receive daily stock alert emails to inform you of which goods are running low or out of stock, allowing you to buy replacements in time.

Track Your Inventory Level

Inventory tracking entails keeping track of the SKUs you hold, their storage locations, and the quantities accessible at each site. Sales tracking is critical for every business operation, especially for small businesses.

Effective small business inventory tracking systems enable organizations to track inventory items in real-time, anticipating how many pieces of specific product lines are in stock and ready for client orders. Inventory tracking software helps you save time and money by automating most of the manual work.

Regular small business inventory tracking benefits the owners in several ways:
  • Reduced number of missed sales
  • More precise reports
  • Cash that is better invested
  • Early notice of problems
  • Reordering with efficiency
  • Cost savings in the warehouse
  • Inventory and year-end efficiency

Bottom Line

A well-managed inventory system ensures that you always have an accurate view of your products. In addition, a well-managed inventory helps you to minimize money waste and earn money. Whether you're looking to learn the foundation of inventory management for small businesses or reinvigorate an existing system, this article will offer you efficient methods for streamlining your operations and repositioning your inventory management system.

Frequently Asked Questions:

Why is inventory management important for small businesses?

Inventory management offers information about your inventory and enables you to make informed decisions. It gives real-time data, allowing you to determine what is working and what is not.

What is the best way to manage inventory for small  businesses?

The best way to manage inventory for small businesses is through various inventory management techniques.Below is the list of best practices for small business inventory management:
  •  Use the FIFO approach
  •  Optimize your forecasts
  •  Learn your ABC analysis
  •  Track your inventory level
  •  Utilize cloud-based inventory   management software
  •  Audit you stock
  •  Receive Inventory Orders Accurately
  •  Economic order quantity

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