Most business that eventually grow big started small just like Apple® and Microsoft®. Some of them started from the garage and they eventually grew to become a household name all over the world. The truth is that beyond having a fantastic business idea, commitment, discipline, dedication and attention to details are some of the basic attributes that makes a small business grow so large.
If you are an entrepreneur that runs a small business or you are into retailing, one of the keys that you would need to make your business grow and become highly profitable is to put a process in place that will ensure effective inventory management. The saying that ‘retail is detail’ correctly describe the concept of effective inventory management approach for small business; you just have to pay attention to every aspect of your small business if you want it to grow.
The Importance of Inventory Management for Small Business Owners
Nothing sends a customer off into the hands of a competitor like inadequate inventory. At the same time, nothing kills cash flow and eventually, profitability like excess inventory.
As a businessperson, you have to keep a balanced inventory to avoid losing your customer as well as to avoid keeping excess inventory. Therefore, you must have a very solid inventory management system. Here are some of the important benefits of inventory management.
a. Prevention of stock-out situations
Imagine that your nearest grocery store is constantly out of your favorite brand of cereal, and then you hear about another store not too far away that almost never runs out of the same brand. Of course, you would start to visit the new store to get your hands on your beloved brand of cereal.
And eventually, since it would be inconvenient for you to shop for groceries in two different stores, you would have to choose one store—and that would of course be the store that always has what you need in stock. Unfortunately, your nearest grocery store has lost a customer due to its poor inventory management.
You must always strive to satisfy your customers’ needs by ensuring that they get access to your products at all times and the best way to do this is through proper inventory management.
b. Avoiding overstock
Overstocking is in itself a problem. When you stock too much of a product, there are chances that you may not be able to sell all of them on time and there is a high probability that some items would go bad or even become obsolete leading to huge losses for your business.
c. Reduced holding costs-: The cost of keeping inventory are highly related to the size of the inventory. If you keep just the right amount of inventory, you wouldn’t have to spend excessively on storage, maintenance, staffing and all other holding costs.
d. Reduction of theft and pilfering
Another problem that comes with stock management, which proper inventory management helps to prevent is reduction of thefts. There are always dishonest employees or customers who try to “help themselves” with some of the company’s products. With proper inventory management and monitoring, you would be able to easily detect and control such situations.
e. Working capital management
You need working capital to manage every aspect of your business. But when you sink in too much funds in stocking goods, other aspects of your business may suffer because there wouldn’t be enough funds for carrying out other activities.
Inventory management helps you hold just the appropriate amount of stocks. Your stocks won’t be too much such that such that you would have to sink too much working capital in it. And it won’t be too little such that your working capital is not put to efficient use.
f. Adequate raw materials
Inventory management is even more important for manufacturers because at no time are you allowed to run out of raw materials. If you ever run out of raw materials or an essential ingredient for production, it could lead to consequential losses like loss of wages paid to laborers, loss of time, and other such losses. Manufacturers use inventory management to ensure that the appropriate amounts of production materials are always available.
g. Accurate profit accounting
Inventory is a business asset on its own. And when you are preparing your financial statement, you have to state the exact value of your current inventory. Without proper inventory management, what you would get at best is an assumed or even exaggerated figure. This also automatically means inflated profits and inaccurate financial reports.
Inventory management helps you to know when to re-order for out-of-stock items. It also helps you avoid time lags in the re-ordering process. Sometimes when you reorder some vital production materials, the supplier would take time before processing your order and delivering to you. With proper inventory management, you would have figured each supplier’s lead time out and would be able to re-order at the appropriate time.
i. Warehouse efficiency
If you have a very large warehouse or several warehouses, it becomes difficult to know which warehouse holds what items, and this leads to unnecessary delays in the production process. With adequate inventory management, such problems can be eliminated or reduced to the barest minimum. It also helps to reduce the costs of warehousing considerably.
j. Identification of potential problems
Proper inventory management makes it easier to quickly identify potential production problems that are related to inventory management and enables you to take prompt actions as well.
Though inventory tracking is not an enjoyable task, it is a key aspect of operating a successful business. Having a good system in place for tracking your inventory and sales will help you figure out what merchandise you have in stock, what you’ve sold, what is still on order, and when your orders will arrive.
With such a system, you can quickly recognize fast-selling products that you need to re-order and slow-selling products that you need to either mark down or promote more aggressively. In addition, tracking your inventory regularly and effectively can help you keep a moderate inventory that is not too much or too little.
Having too much inventory ties up funds that could otherwise be used to for operation costs or for other more important purposes. Having too little inventory, on the other hand, makes you lose revenue because you do not have enough products to sell. Having discussed the importance of inventory and sales tracking, let’s now discuss how to track inventory and sales in your small business. There are many ways to track your inventory, and all these methods fall under two categories: manual and automated.
Two Ways to Track your Inventory and Sales
I. Manual method
To track your inventory using the manual method, start by counting your products to determine the starting inventory. Then categorize your inventory first by product name, then by other specific attributes of the products, such as color, size, usage, date, or style.
For example, if you have perfumes as inventory, you’ll want to categorize them by the name, then by whether they are for men or women or both, then by size. This makes it easier for you to track what you need and what you’ve not sold. After sorting the items on your inventory into categories, create a spreadsheet in Microsoft Excel to track your inventory and sales.
Simply create a worksheet for each product and list the initial inventory count for that product. From that point, adjust the initial inventory count as necessary. That is, subtract all sales of each product from your register and add new arrivals to it. Do this at least once a week, adjusting the inventory total as necessary.
Microsoft Excel will suffice if you have less than 10 different items on your inventory. However, if you have more than 10 items on your inventory, a better option is to set up an inventory database in Microsoft Access. Microsoft Access offers inventory templates that are semi-automated, more attractive, and easier to use. And you can print out convenient inventory reports to track sales, additions to inventory, and returns. However, it is still not as effective as a fully automated system.
II. Automated method
If you run a business that has several different items on its inventory (such as a retail store), you will need to use an automated system because the manual method of inventory and sales tracking will be too cumbersome, if workable at all.
While there are many automated methods, the commonest and most effective one involves integrating professional inventory management software with a barcode scanner and registers in your store. Each product has a unique barcode, which is scanned at the checkout point. The barcode contains the price as well as other relevant information about the item.
Once the barcode scanner has detected and registered a product for sale, it automatically records the sale and deducts the number of units of that item purchased from the total number of units left in the store. This is done within a matter of seconds.
Another method involves the use of radio frequency identification, which tags each inventory item with a plastic tag that contains a programmable microchip and a small antenna. The tags contain relevant information about each product and can be read by special hand-held reader.
Although this option is more expensive than the use of barcodes, it comes with many advantages. The tags can be read from a long distance. A huge pile of tagged items can be read at once and the information on the tags can be updated immediately as the items are moved from one point to another within your store. And interestingly, the tags can be set to trigger an alarm when the item leaves the store—preventing theft of tagged goods.
So, if you sell items that are very expensive, such as jewelry, you’d be better off with this option. Even if you are tracking your sales and inventory with an automated system, do a manual check at least once in a year to ensure that you’ve not lost some inventory items.
10 Effective Inventory Management Tips for Small Business
The truth is that, if you don’t keep proper records of all the transactions of products and services in your business you are likely going to struggle to make profits and it will surely affect your budgeting. As a matter of fact, poor inventory management is part of what makes a company go bankrupt. Now let us quickly go through the 10 effective inventory management tips for small business:
1. Create a Special Excel Spread Shit for Daily Stock Taking
One of the basic thing you need to do to ensure effective inventory management for your small business is to create a special excel spread shit for the purpose of taking stock daily. For instance if you run a mom and pop business and you cannot afford a customized software, you can print out an excel spread shit and do manual stock taking; a hardcover book can even serve same purpose.
2. Ensure that Every Goods that Enters Your Warehouse are documented by Different Officials
Another tip that will guarantee you effective inventory management for your small business is to ensure that every goods that enters your warehouse or store are documented by different official. The process is simple, once a truck brings in good to your warehouse, the driver of the truck will present his waybill to the security man at the gate, the security man will confirm and take his/her own stock, and then the warehouse manager too should take his/her own stock separately from the security man.
4. Consult Software Developers to Develop Customized Inventory Software for Your Business
There are customized inventory software that ensures effective inventory management; it will help you create invoices and also generate receipts for every business transactions. The truth is that most small business might not be able to pay a software developer to help them develop customized software for their business. If you can afford customized software for your business, by all means please do.
4. Enforce Compulsory Issuing of Receipt for Every Business Transaction
Another tip for effective inventory management for small business is to enforce issuing of receipt for every business transaction. As a matter of fact issuing receipt electronically is what is in vogue. It will help your business plug loopholes that can drain your business.
5. Encourage the Use of P.O.S Machine as against Cash
If you want to implement effective inventory management structure for your small business, then you must encourage cashless transaction. The use of Point of Sale Machine (POS) is one effective way to minimize fraud in small businesses. With POS machines you can be rest assured that your sales girls / boys won’t steal your money.
6. Create a Central Database System:
You would have to create a central database system especially if you have multiple sales points. A centralized database system will facilitate easy tracking of every business transaction in your company in real time. As a matter of fact you can sit in your office or home to monitor the flow of your business once you have a centralized database system.
7. Develop Your Customized Tracking System
There are various tracking systems that you can put in place to enforce effective inventory management for your small business. You can sit with your team to determine the best tracking system that will suit your business. But if you run a haulage business or a taxi business, you can install car tracker to all your trucks and cabs – it is the easiest and most convenient ways to track inventory for such business.
8. Create a Business Process that will help you receive feedback from your clients
Another way to implement effective inventory management for your small business is to create a business process that will help you receive feedback from your clients. For example in some banks, whenever you deposit cash, you would need to drop a copy of your teller in a box inside the bank and you would also be required to enter details of your transaction in a ledger. You can adopt this model of inventory tracking if it suits your business.
9. Inform Your Suppliers and Vendors of The Report You Want from Them
Another way to ensure effective inventory management for your small business is to liaise with your suppliers and vendor to discuss your expectation from them when it comes to inventory. Your agreement with them could be that you can access the details of all the transactions with them on a bi – monthly basis, 6 month basis or even annually. It is a way of comparing records to be sure that you are on track.
10. Hire Inventory Consultant to Help You Review Your Inventory Structure from time to time
Lastly one of the things you need to put in place to ensure that you implement effective inventory management style for your small business is to hire an inventory consultant to help you review your inventory report and structure from time to time. This approach will help you correct errors in your business process.
There you have it; the 10 effective inventory management tips for small business.