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Grow Your Business Technology

10 Essential Tips for Effective Inventory Management

image for ESB Professional/Shutterstock
ESB Professional/Shutterstock

Inventory management is a crucial piece of a business's profitability, but a lot of SMBs don't practice good management practices when it comes to the items they sell.

It makes sense that having too little inventory is a detriment to a business. Customers become frustrated when the items they're looking for aren't available on the shelf or through your website. At least some of those customers will go elsewhere for the missing item. This runs the risk that those frustrated consumers may never return.

Some businesses go the other way, though, and overstock items "just in case." While you're sure to always have the items your customers are looking for, the risk with this strategy is bleeding money from your business. Not only does excess inventory tie up valuable cash flow, but it also costs more to store and track.

The answer to effective inventory management lies somewhere between these two extremes. While it requires more work and planning to achieve an efficient management process, your profits will reflect your effort.

Here you'll find the 10 essential tips to effectively manage your inventory for increased profitability and cash flow management.

Categorizing your inventory into priority groups can help you understand which you need to order more of and more frequently, and which are important to your business but may be costly and move more slowly. Experts typically suggest segregating your inventory into A, B and C groups. Items in the A group are higher-ticket items that you need fewer of. Items in the C category are lower-cost items whose inventory turns over quickly. The B group is what's left – those items that are moderately priced and move out the door more slowly than C items but more quickly than A items.

Make sure that you keep a record of the product information you have for items in your inventory. Information should include SKUs, barcode data, suppliers, countries of origin and lot numbers. You may also consider tracking the cost of each item over time so you're aware of factors that may change the cost, like scarcity and seasonality.

Editor's Note: Need help with managing your business's inventory? Fill out the questionnaire below to have our vendor partners contact you with information.

Some businesses do a comprehensive count once a year. Others do monthly, weekly or even daily spot checks of their hottest items. Many do all of the above. Regardless of how you do it, make it a point to physically count your inventory regularly to ensure it matches up with what you think you have.

An unreliable supplier can cause problems for your inventory. If you have a supplier that is habitually late with deliveries or frequently shorts an order, it's time to take action. Have a discussion with your supplier about the issues and find out what the problem is. Be prepared to switch partners, or deal with uncertain stock levels and the possibility of running out of inventory as a result.

As a general rule, 80 percent of your profits come from 20 percent of your stock. Make inventory management of these items a priority. Understand completely the sales lifecycle of these items, including how many you sell in a week or a month, and closely monitor them. These are the items that make you the most money; don't fall short in managing them.

It may seem like common sense to make sure incoming inventory is processed, but do you have a standard process that everyone follows? Or does each employee receiving and processing incoming stock do it differently? Small discrepancies in how new stock is taken in could have you scratching your head at the end of the month or year, wondering why your numbers don't align with your POs. Make sure all staff that receives stock does so the same way, that all boxes are verified received and unpacked together, accurately counted, and checked for accuracy.

Again, this seems like a no-brainer, but it goes beyond simply adding up sales at the end of the day. You should understand, on a daily basis, what items sold and how many, and update inventory totals. But more than that, you'll need to analyze this data. Do you know when certain items sell faster or drop off? Is it seasonal? Is there a specific day of the week when you sell certain items? Do some items almost always sell together? Understanding not just your sales totals but the broader picture of how things look is important to keeping inventory under control.

Some vendors offer to do inventory and reorders for you. On the surface, this seems like a good thing. You save on staff and time by letting someone else manage the process for at least a few of your items. But remember that your vendors don't have the same priorities you do. They are looking to move their items, while you're looking to stock the items that are most profitable for your business. Take the time to check inventory and order restocks of all your items yourself.

If you're a small enough business, managing the first eight things on this list manually, with spreadsheets and notebooks, is doable. But as your business grows, you'll spend more time on inventory than you do on your business, or risk your stock getting out of control. Good inventory management software makes all these tasks easier. Before you choose a software solution, make sure you understand what you need, that it provides you with the analytics important to your business, and that it's easy to use.

Inventory management software isn't the only technology that can help you manage stock. Things like mobile scanners and POS systems can help you stay on track. When investing in technology, prioritize systems that work together. Having a POS system that won't talk to your inventory management software isn't the end of the world, but it might cost you extra time to transfer the data from one system to another, making it easy to end up with inaccurate inventory counts.

Dawn Kuczwara

Dawn Kuczwara is a former executive with more than 17 years of experience in technology. Now, as a professional writer, Dawn uses that experience to write about business, technology and leadership. When she isn’t wordsmithing, she spends her time doing improv comedy, reading, playing video games and hanging out with her family and two dogs, Pip and Zoe.