How to Take Inventory for Your Small Business: 9 Tips to Kickstart Your Strategy

There are few things more critical to the success of your small business than a robust and well-rounded inventory management process. The trouble is, if you’ve never had to manage inventory before, it’s tough to know where to start.

With inventory management, there can be dozens of moving pieces. It’s made even more complicated by the fact that there’s no one right way to manage inventory. What works for the business down the street may not work for yours.

In this article, we’ll give you a set of universal guidelines that you can tweak and explain the basics of how to take inventory for a small business.

How to take inventory for a small business

• What is inventory management?
• Maintain a high level of organization
• Receive inventory accurately
• Use the right tools
• Make data-driven decisions
• Have a formal process in place
• Do regular inventory counts
• Optimize your storage space
• Implement Just-In-Time inventory
• Establish strong supplier relationships

What is inventory management?

Inventory management is a process and set of systems for managing inventory and stock. It’s a subset of the much broader supply chain management concept. For most retail businesses, inventory management is going to encapsulate the following tasks:

• Ordering stock
• Storing stock
• Selling stock
• Tracking stock levels

The importance of inventory management

Effective management ensures that a business has the right amount of stock at the right time, preventing both overstocking and stockouts. 

While these tasks may seem mundane, and even “simple” or “easy,” doing them (and doing them well) helps create a rock-solid foundation for your business to operate from. You’ll avoid potential problems and enjoy optimizations like:

• Prevent out of stock issues for your popular products
• Know the kinds of sales/promos to run to move underperforming stock
• Know the right quantity of items to keep on hand to maintain optimal cash flow
• If you sell perishable goods, it can help you avoid spoilage

Common inventory management challenges

Common pitfalls in inventory management include:

• Overstocking: this ties up capital and storage space, potentially leading to obsolescence or wastage
• Understocking: this can result in lost sales and customer dissatisfaction due to unavailable products
• Mismanagement of Perishable Goods: this often leads to spoilage and financial loss

To address these issues, follow our tips, like employing automated inventory management systems, maintaining clear communication with suppliers and regularly analyzing sales data to fine-tune inventory practices. These strategies help balance supply and demand, ensuring operational efficiency and customer satisfaction.

1. Maintain a high level of organization

The first step in staying on top of your inventory is to organize your items with as much data and product information as possible. Successful inventory management is a direct result of strong data analysis. By starting with rich, accurate product data, you’ll avoid errors down the line and have an easier time investigating any issues you might uncover. 

Typically, this data would be entered into a point of sale (POS) system, but it’s also possible (but very tedious) to track this data with spreadsheets. 

That being said, here’s some of the data you’ll want to input for each product:

• Name
• Department
• Category
• SKU
• UPC
• Supplier and Supplier ID
• Sales Price
• Tax Rate
• Discountable (Y/N)
• Cost per Item
• Current Quantity
• Reorder Trigger
• Recommended Order

If you sell items with variants, you’ll want to make sure that you enter each variant as part of a matrix. The classic example of an item with variants is a t-shirt that’s sold in multiple sizes and colors. Each combination of size and color is a unique variant of one parent product. By creating a matrix, you will be able to track the quantity, sales data and more for each variant on an individual basis.

2. Receive inventory accurately

Much like our first tip, you’ll want to ensure that you receive and input new stock from suppliers into your point of sale system as accurately as possible. Entering the wrong product quantity or mislabeling a product can cause a bunch of issues later down the line. The best way to ensure that you receive and input stock from suppliers accurately is to create a standardized process and follow it every time you receive a shipment.

Here’s an example of what that process might look like:

• Whoever is receiving the shipment should have a list of the items you’ve ordered or a copy of the original purchase order
• The receiver should ensure that all expected boxes/packages are received (i.e. nothing is left in the truck)
• The receiver should unpack all boxes and compare the contents against the list or purchase order
• If there are no errors or issues, go ahead and enter the shipment data into your POS, spreadsheet or other tracking systems
• If there are issues, take note of them and contact your supplier. You can then enter the rest of the shipment into your system

Because receiving an order accurately is such an important part of inventory management, you may want to handle this part of the business yourself, or rely on a trusted senior employee.

3. Use the right tools

Inventory management is a lot simpler when you use POS software. This is the case because of the quantity of data and the rate at which inventory turns over within most retail businesses. If you try to manage it all with a spreadsheet or pencil and paper, it’s highly likely that the task will start to feel like a burden that you want to skip at the end of a busy day. Plus, with so many moving parts, you increase the likelihood of errors, which can throw off all of your inventory data.

With a POS system, outside of creating your product catalog (typically done once during initial setup) and receiving new stock, inventory management is an automated process. When you sell a product, your stock levels are automatically updated. You can easily query your system to see how much you have of a product on-hand, and there are typically detailed inventory reports that you can use to better understand what’s going on in your business.

4. Make data-driven decisions

One of the main reasons to use a POS, especially from an inventory management perspective, is the variety of reports you’ll have at your disposal. These reports will cover everything from sales volume by product, profit margin analysis, inventory turnover rate and much more. With this information, you’ll be able to make more informed decisions that help you shape your overall business strategy. 

Here are a few of the insights that you can expect to derive from your point of sale system’s reporting capabilities:

• Identify your top selling items so you can prioritize keeping them well stocked. Lightspeed customer Limbo Jewelry is able to share sales with suppliers thanks to built-in reports: “They say we’re the most organized store they work with because we’re able to pinpoint exactly what’s selling, exactly what’s not selling.”
• Monitor profit margins per product so that you can identify opportunities to renegotiate with your suppliers
• Check your inventory value at any given time to understand how much capital you have tied up in inventory

If you’re an Excel wizard, it’s certainly possible to create similar reports with spreadsheet software and custom formulas. However, you’ll have a much easier time of it if you get a POS system and let it do the number crunching for you. Plus, this frees you up to focus on tasks to grow your business, like interpreting your reports and making better decisions based on your findings. 

5. Have a formal process in place

While tools like a POS or dedicated inventory management software can help to simplify inventory management and allow you to get more value from your data, you still need an overarching process in place. Two of the most popular methods are First In, First Out (FIFO) and the average cost method.

Businesses that use FIFO make an effort to sell older stock before newer stock. For certain business types, like those that sell perishable goods, FIFO is a necessary means of deriving as much value from stock as possible. For example, imagine how a convenience store stocks drinks. Items in the front of their refrigerators typically expire sooner than objects placed in the back.

For the average cost method, businesses will assign the cost of an item based on the total cost of goods they purchased divided by the number of units purchased. This method is simpler to apply and less expensive than FIFO, making it an appealing option for items that are difficult to calculate costs for. 

Regardless of the overarching system you use, it’s essential that you understand the difference between FIFO and LIFO inventory valuation so that you can select the right one for your business.

6. Do regular inventory counts

Even if you have a POS system or inventory management tool in place, as well as a process for receiving stock, you’ll still want to do manual inventory counts periodically. Depending on the size of your business, you might do these on a semi-annually, quarterly or even monthly basis.

These counts are important because they function as a backup to your day-to-day system, and can help you uncover flaws in your process. If the idea of setting aside the time to count all of your inventory at once sounds a little overwhelming, you can also perform cycle counts.

Cycle counts are quicker checks where you count only a smaller portion of your inventory. For example, one month you might check your shoe inventory, and another your hat inventory. Besides saving you time, doing so can help you uncover issues much more quickly than a more massive quarterly check, though experts recommend that you do at least one full inventory count per year for income tax reporting.

Quick tip: make cycle counts more accurate by using a tool like Scanner by Lightspeed, which turns a mobile device into an inventory management tool that updates your POS in real time. You can even make counts go faster by having multiple employees counting on individual devices at the same time.

7. Optimize your storage space

Start maximizing your existing storage space through efficient use of shelving. Use vertical space by installing tall shelves to store items, ensuring you make use of the full height of your storage area. Group similar items together and keep frequently accessed products at eye level to minimize time spent retrieving them.

Clear labeling is crucial. Label shelves and bins with detailed descriptions, barcodes or color codes. This simple step can significantly reduce the time it takes to locate items, reducing errors and improving inventory accuracy. 

Regularly audit your storage area to keep it clutter-free. Remove outdated or slow-moving stock to free up space for new inventory. Consider a first-in, first-out (FIFO) method to ensure older stock is sold before newer stock, which is especially important for perishable goods.

8. Implement Just-In-Time (JIT) inventory

Adopting a Just-In-Time (JIT) inventory approach can significantly enhance a retailer’s inventory strategy by reducing holding costs and minimizing waste. 

JIT involves ordering and receiving inventory only as it is needed for sale or production, rather than stocking up in advance. It reduces holding costs by minimizing the amount of stock you need to store, lowering storage expenses and reducing the risk of obsolescence. It also minimizes waste, particularly for perishable items, as products are sold before they have a chance to expire. 

To implement JIT effectively:

• Ensure suppliers can deliver products quickly and consistently
• Utilize inventory management software to track sales trends and forecast demand accurately
• Maintain regular supplier communication and share sales forecasts and inventory needs
• Streamline your ordering process by setting up automated reorder points based on inventory levels and sales data

Setting reorder points in Lightspeed Retail.

9. Establish strong supplier relationships

Strong supplier relationships ensure reliable and timely delivery of goods, critical for maintaining optimal stock levels and meeting customer demands.

To build and maintain good supplier relationships:

• Engage in regular dialogue with your suppliers. This helps in understanding each other’s needs and expectations, leading to a more cooperative partnership
• Work towards mutually beneficial terms. Regular negotiation can lead to better pricing, payment terms and delivery schedules
• Acknowledge the importance of your suppliers. Positive reinforcement can foster loyalty and prompt service
• Collaborate on inventory forecasts and orders. This shared planning can reduce errors and improve the accuracy of your inventory levels
• Implement a B2B commerce platform like NuORDER by Lightspeed to streamline the ordering process. This technology enhances efficiency for both supplier and retailer, ensuring smoother transactions, better tracking and faster fulfillment of orders

Give your business stronger tools for inventory management

Inventory management is crucial to your business’s operations and success. Organizing your systems will go a long way as far as counting your items, setting up your floor, and making your employees more productive and efficient. Accurate counting means further discrepancies and a better bottom line for your business. 

A POS like Lightspeed can automate inventory management for you and provide you with valuable information to help you make smarter decisions. Chat with our experts to see if our solutions are right for your business.