How To Manage Small Business Inventory

How To Manage Small Business Inventory

Written by Bryan Daly
Fact-checked by Caitlin Wood
Last Updated June 11, 2021

A small business can be a great source of income and pride for many Canadian entrepreneurs. Then again, many businesses require a constant stream of sellable inventory in order to make a respectable profit throughout the year and that can be somewhat difficult without proper management.

So, whether you’re an experienced small business owner or your operation is just getting off the ground, it’s important to learn the right strategies so you can buy, sell, and restock your inventory in the most efficient and cost-effective ways possible. If that’s your goal, Loans Canada has some advice that you may find useful. 

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What Is Inventory Management?

Any product or supply can be highly profitable in its own way. That said, some items can be cumbersome, overly expensive, and stay in your inventory for months at a time if they aren’t as popular with customers as you were hoping. 

To prevent these problems, businesses must consistently manage what goes in and out of their inventory, which is particularly important whenever items are large, perishable, or limited. Unfortunately, every unsold item in your inventory will gradually cost you more money, so whatever system you set up must be flawless.

How Your Small Business Will Benefit From Inventory Management 

Luckily, there are countless programs and techniques that you can use to keep track of every item in your inventory in real-time. This way, you can avoid ending up with unused stock that could cost your business more than you were expecting. 

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These inventory management methods are essential because they help you:

  • Save on storage costs and stock room space
  • Monitor every item in your inventory, no matter what time of day
  • Stop wasting money on products that expire (food, raw goods, chemicals, etc.)
  • Track stock in all your storage locations using any mobile device or computer 
  • Improve your business earnings and optimize employee schedules
  • Reduce the amount of debt your business is carrying 
  • Apply easy, fast bar code scanning to all of your products

What Is Dead Stock?

Another major benefit of having a proper inventory management system is that you can also avoid “dead” stock. Simply put, dead stock is any item that’s unsellable because it’s spoiled, outdated, or otherwise unpopular for some reason. Like all unused goods in your warehouse, any dead stock that you’re holding onto will slowly put your business further in debt, not to mention take up valuable space in your storage area.

How Does Inventory Management Enhance Your Business Cash Flow?

Depending on what type of small business you’re running, your inventory can indeed have a significant negative or positive effect on your cash flow and the available working capital you have to deal with day to day expenses. After all, you’ll have to finance a bunch of goods, but won’t be able to earn that money back and turn a profit until you’ve actually sold them. 

However, by incorporating a proper management software, as well as some of the other methods below, you’ll have an easier time tracking exactly how many items you have in your inventory and when they’ll need to be restocked, according to your predicted sales.   

Inventory Management Methods That You Should Implement

Whether you’re just starting a small business or you’ve had trouble managing your inventory in the past, don’t worry, because there are techniques that can make things easier on your budget, including but not limited to:

Set Your Sales Expectations Appropriately

As mentioned, one of the most important aspects of managing your inventory is that it helps you predict when your shelves will need restocking, based on how well each item could sell in the near future. This is commonly called “forecasting”. 

It’s also essential to prepare for any unexpected events that might come about while you’re trying to sell your stock, such as increases or decreases in product demand, sales promotions, or problems with the manufacturer. This way, you’ll be less likely to run out of anything or end up with an inventory that you can’t sell. At the very least, you can establish a backup plan for when those situations occur. 

Identify The Products That Will And Won’t Sell

Also known as “low-turn” stock, the next step you should take is to go over your current inventory and weed out the items that may or may not sell within a reasonable timeframe. So, if you’re stuck with any unpopular products, it may be a good idea to put them on a discount or offer a promotional deal to get rid of them. While this may result in a loss, at least you’ll free up storage room for better stock.

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Introduce The FIFO And LIFO Techniques

If you’re simply having a hard time calculating the overall cost of your inventory, it could be because you haven’t yet applied the “first in, first out” or “last in, first out” principles to your business strategy:

  • FIFO is a popular technique for businesses that sell both perishable and non-perishable supplies. Essentially, the first products that you buy are the first ones you should sell to avoid any spoiled or outdated goods.
  • LIFO is a similar principle, except that you would sell your most recent stock first. This method is more common for grocery stores and other businesses that offer fresh produce and items that expire or get outdated quickly. 

Get Batch Tracking

Although monitoring individual items is important, so is tracking whatever supplies you would buy in bulk. Essentially, batch tracking helps control the quality of your products because you can keep tabs on full shipments of perishable items and even trace faulty supplies back to their source. 

Use The ABC Principle

Another way to track and manage the cost of your products is to use the basic ABC analysis technique, wherein you separate your inventory into three sections that are based on how valuable certain items are:

  • Section A refers to the items that have the most overall sales value and the chance of making a profit for your business. 
  • Section B is reserved for items that are medium-grade, meaning they are somewhat profitable but not your highest selling products. 
  • Section C is where you would mark down smaller or less valuable items that can be useful but don’t have a very significant impact on your profit margin.

Audit Your Inventory Frequently

Simply put, consistently monitoring your inventory management software and storage reports is crucial, no matter how long it takes. This process can include:

  • Physical Auditing – Checking your products individually is one way to be sure that all the numbers line up, especially at the end of the year when it’s time to file your income taxes. However, this is by far the most time-consuming inventory management method.
  • Cycle Auditing – If yearly checks are too long and tedious, you may prefer to audit your inventory in weekly, bi-weekly, monthly or semi-monthly cycles. Typically, you would want to monitor the most profitable items more frequently. 
  • Spot Checking – Rather than looking at every item in your inventory, you would monitor specific products or shipments over the course of the year. Like with cycle audits, you would focus mainly on items that sell quickly (or vice versa).     

Implement Dropshipping 

A common practice for third-party vendors, dropshipping is when your business doesn’t actually have to deal with the woes of inventory management. Instead, customers can order their products through your business and the wholesaler or producer would take care of all the shipping and handling procedures for you.

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Inventory Management FAQs

All this said, there are many other techniques that can make managing your inventory less of a chore. Don’t forget to speak with a business expert to find out which ones would benefit your operation the most and ask them lots of questions, such as:

How Could Holidays Or High Seasons Affect My Inventory? 

No matter what kind of products your business sells, there are sure to be a few points during the year when your storage facility gets busier than usual. Whether it’s summer or winter, Christmas, or Black Friday, there are times when you could easily lose sales because you’ve run out of stock. Unless you’re prepared, that is. 

To avoid this hassle, it’s best to take these measures before the high season:

  • Take on some extra seasonal employees
  • Get consistent reports from your inventory manager and keep them on file 
  • Implement or update the right inventory management software 
  • Oversee all shipping orders, stocking procedures, and associated costs 

What’s The Difference Between MOQ And EOQ?

Remember, inventory management is all about efficiency and saving as much money as you can on the back end. As such, it’s best if you can balance your orders properly so you don’t end up with too little or too much product. That’s why many businesses and suppliers use these two formulas: 

  • EOQ or Economic Order Quantity is when a business uses factors like estimated production costs, storage fees, and customer demand to calculate the optimal amount of supplies they will need regularly. 
  • MOQ or Minimum Order Quantity is the smallest amount of product that a particular supplier is prepared to sell you. Usually, if an item is more expensive to produce, they’ll offer you a lower MOQ and vice versa. However, if you can’t afford the MOQ, the supplier might not take you on as a client at all.

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Why Is It Important To Have a Good Relationship With Your Supplier?

Another essential step to take when managing your inventory is to maintain a solid and long-standing rapport with your suppliers. After all, you may experience problems with your orders or the products you buy, which could hinder business if you cannot resolve these issues in a timely and friendly manner.

If your relationship is strong enough, some suppliers will be more willing to negotiate on the price of goods or put you first in line to receive new stock. Always choose a supply company that has a trustworthy reputation and be ready to inform them when your inventory needs refilling so they can modify your orders accordingly.

Bottom Line

No matter what size your business is, responsible inventory management is one of the essential steps to success. As a business owner, it should be your top priority to find an inventory management process or product that helps you stay on top of your inventory an achieve your goals.

Rating of 5/5 based on 1 vote.

Bryan is a graduate of Dawson College and Concordia University. He has been writing for Loans Canada for five years, covering all things related to personal finance, and aims to pursue the craft of professional writing for many years to come. In his spare time, he maintains a passion for editing, writing screenplays, staying fit, and travelling the world in search of the coolest sights our planet has to offer.

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