Small Business Inventory Management and Organization

When you run a small business, it is extremely important to keep things organized. This is especially so when it comes to inventory.  You need to have great inventory management to keep track of your inventory and prevent not knowing where things are or missing key materials you need.  In this article, we are going to give you some tips and tricks on how to organize the inventory of your business.

What is Inventory Management?

Inventory Management is a systematic approach to all processes involved with the inventory. It involves obtaining, storing, and profiting from the materials you use in your small business. 

How to organize inventory for small business

We’re sharing with you a few tips you can use to make your inventory management more efficient (which could save you a lot of money in the process):

• Focus on Forecasting

Forecasting is a tool you can use to predict how much inventory you will need. You can use previous sales figures, but be sure to also consider market trends, any special promotions you have coming up, and predicted growth. 

After taking all of that into consideration, analyze how much product you will likely sell and buy the materials needed to make that much product.

• Use the FIFO Approach (First In, First Out)

This technique is simply ensuring the items you make or buy first are sold first. 

If you sell perishable items like food or flowers you want to sell them before they start wilting or expiring. This may seem like a small thing, but ensuring you sell your items in the order they are made or bought prevents wasting inventory on expired items. Doing this gives you a system that makes it easier to sell your products.

• Count Your Stock

Most small businesses use some sort of computer software to keep track of their inventory, but it is a good idea to count your inventory yourself at least once a year. You never know when software can stop working properly or inventory could be misplaced. 

If you are having troubles with inventory you may do a spot-check to make sure the inventory in your system matches what you have.

There are a few other aspects of inventory management that warrant going into a bit more detail, let’s dive into them.

What is Inventory Turnover Ratio?

Inventory turnover ratios are an important concept in inventory management. Inventory turnover ratios essentially show the number of times a company sells and replaces inventory during a certain period.  The higher the ratio the better, as that means that a product is selling well and needs more materials.  If the ratio is low, that product is not selling well, and you may need to start investing fewer materials into that product. 

How to calculate inventory turnover

Here is the formula for finding the Inventory Turnover Ratio:

Cost of Goods Sold ➗ Average Inventory = Inventory Turnover Ratio

As the name implies, the Cost of Goods Sold (COGS) is equal to the production costs of the products. COGS can include the cost of materials, labor costs, and any factory overhead or fixed costs that are used in the production of goods.  Average Inventory is the average of the product you have in stock, which is used to make up for the fact that inventory can fluctuate throughout the year (it might be lower during slow periods or higher during holidays, etc.).  After doing the above you need to find the Days Sales of Inventory (DSI):

(Average Inventory ➗ Cost of Goods Sold) ✖️ 365 = Days Sales of Inventory

This measures how many days it takes for inventory to turn into sales. A higher DSI means that the inventory is taking longer to turn into a sale.  You can compare products using this method to figure out which product can handle a decrease in inventory the best.

How to Find Average Inventory

For the inventory turnover formulas we talked about average inventory, so you will need to know how to figure that out as well.  This is simple enough, as you merely take the value of the inventory at the beginning of the period (year, quarter, etc.) and add it to the end of the period and divide that number by 2. 

(Beginning Inventory ➕ Ending Inventory) ➗ 2 = Average Inventory

Inventory Management Software

Since Inventory Management is so crucial, it might be a good idea to get computer software to help in this process. This can often be a cheap way to manage your inventory efficiently.  There are a lot of different software packages that you can use, but they all tend to do similar things.  Below is a list of the pros and cons of most inventory management software packages to give you an idea of what they can do and what pitfalls they could bring:

Pros of Inventory Management Software:

• Automated In-Stock Information

The software allows you or the customer to know immediately whether an item is in stock. This can not only reduce confusion when you run out of something, but it can also notify you when you need to reorder some inventory items.

• Accounting Integration

A lot of inventory management software integrates with accounting software which can be extremely useful in tracking cash flows and other costs. This can also save you money by preventing the need for additional bookkeeping.

• Forecasting and Planning

We’ve already discussed the importance of forecasting, but that can be quite difficult to do on your own. Most inventory management software generates forecasting reports for you to analyze.

Cons of Inventory Management Software:

• Technical Issues

Anyone that deals with technology regularly can tell you it not always means smooth sailing. There are always glitches or issues that can affect the software, and the worst-case scenario is that the system can shut down completely. 

Most software packages will have some sort of tech support, but you should always have a backup plan in case your system goes down.

• Replaces Physical Inventory Audits

Some business owners make the mistake of using the software as a crutch to avoid physical audits, which are admittedly time-consuming. 

However, it is important to spot check your inventory frequently to catch issues like breaking or spoiling. Plus, there is always a chance that your software messes up, and you want to be able to catch that as quickly as possible.

Can you sell online without inventory? You can with Dropshipping, a business model that allows owners to sell products without having them in stock.

Good Inventory Management Will Make Your Life Easier

We hope this article has given you a better idea of how to manage your inventory. After all, it is in your best interest to start using good inventory management practices. Consider an inventory financing loan if you need funds to buy more products for your business. At Camino Financial, we offer competitive and fixed interest rates. Apply For A Business Loan!