As an entrepreneur, you’ve worked your tail off to get your business up and running. There was probably a lot of trial and error along the way, but now you’ve got a product or a line of products that customers want. That’s great, but as you grow, you’ll need to start taking your inventory management more seriously.
If you’ve been keeping your inventory in boxes in your garage or on shelves in your office/guest bedroom, it’s time for an upgrade. Proper inventory management will help ensure you:
- Know exactly how much product you have on hand
- Don’t over-order or under-order inventory
- Can quickly reorder items before they go out of stock
- Understand how each product is selling
In other words, good inventory management will help you make more money and grow your business. Here are some of our top tips on inventory management.
Invest in Inventory Management Software
Is the sum of your inventory management system a spreadsheet on your phone or computer? Spreadsheets can be a great way to track your inventory at the start of your business, but as your business grows, you’ll most likely want more insight and control over what products are coming in and out.
The good news is that over the past years, many effective and low-cost inventory apps have hit the market. A good number of these apps are even designed specifically for small business owners. A few apps to consider are:
Give Every Item a SKU
As you’ll learn when you dive into the world of inventory management, labeling things is a big deal. When it’s time to take your inventory up a notch, one of the first things to do is to give every item a SKU (Stock Keeping Unit). A SKU is a unique identifier usually made up of a mix of numbers and letters. It lets you precisely track every individual item in your inventory and makes it much easier to locate items when you fulfill orders. Many inventory management systems automatically generate SKUs based on predefined rules or product attributes (such as brand, style, color, and size).
Try the ABC Inventory System
You probably have an idea of which products sell the best and which don’t, but use your ABCs to formalize the process. Award an “A” to your highest-selling or highest-value products. Give a “B” to your more moderately successful products. Your slower products? That’s right, they get a “C.” The ABC system is simple on the surface, but it can help you figure out how to spend your limited time and marketing dollars.
Rent a Storage Unit
If your inventory is taking up all the space in your garage, attic, or guest room, it’s time to upgrade. Renting an office or warehouse can be expensive, as can contracting with a fulfillment or distribution center. A creative and cost-effective business inventory storage solution is to rent a storage unit.
Self-storage companies offer storage units in various sizes. You can bring in free-standing shelves to better organize and label your inventory. Just make sure to spring for a climate-controlled unit if your inventory includes sensitive items.
Pick a Par Level
The moment you run out of inventory is the moment you begin losing money. Don’t let that happen. Instead, create a “par level” for every item in your inventory. A par level is the minimum amount of product you should have on hand at all times. Consider how quickly an item is moving and how long it takes to restock to help you choose the right par level for your inventory. You may also want to regularly adjust your par level as purchase patterns change.
Conduct Regular Inventory Audits
Working with an inventory management software system will certainly help lower errors, but the best way to maintain accurate records is to conduct regular inventory audits. That means physically counting and noting every item in your inventory. The process can be long and tedious, but it will reduce discrepancies and make sure your inventory management system is up to date. Small business owners can also try cycle counting, which means counting just a portion of inventory each week or month to keep inventory records accurate.
Forecast Demand
Customer demand for any given product often isn’t steady. Items like rain jackets, chocolates, calendars, and journals can all be impacted by the season. Demand for other items can change with the weather, the economy, or fads. Understanding the demand for your products can help ensure you have enough on hand when interest and sales are the highest. It can also help you reduce your inventory when demand is low, so you aren’t trapping your money in inventory that isn’t moving.
Analyze your historical sales data and see if you can find trends in sales volume. Pay attention to broader market trends and economic factors that could impact demand. Your inventory software can be extremely helpful in generating historical sales reports for you to review.
Track Your Inventory
Perhaps the greatest benefit of implementing a professional inventory management system is that it allows you to effectively track your inventory. You’ll be able to see exactly what customers are buying, what they’re returning, and how purchasing habits change over time. Use your inventory system to track your most important metrics, such as:
- Inventory Turnover Ratio: Measures how quickly you’re selling inventory
- Days of Inventory on Hand: Indicates how long your current stock will last
- Gross Margin Return on Investment: Measures profitability of your inventory investment
Use these metrics to improve the operation and profitability of your business. For example, your inventory analytics may give you ideas on which product lines to expand, which seasons you should order more or less of a product, and which products to retire.
Get Serious About Inventory Management
As a small business owner, you’ll need to be your own inventory management expert. Fortunately, today’s software solutions can give you a big leg up without breaking the bank. Following our tips is a great start to taking better control of your inventory so your company continues to thrive.