Inventory Management System For Small Business – You’ve signed a lease, renovated the place, and installed brand new lights. You have a $10,000 espresso machine. You brought back $50,000 in designer bookshelves from Copenhagen.
You’re almost ready to open your cafe bookstore, but something’s missing: you have nothing to sell! You need to order some inventory.
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How much inventory should you order? How should you track it? And when to order more?
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Inventory is what your business creates when it buys things it doesn’t sell right away. For example, when:
In a perfect world, businesses wouldn’t need to hold more than the minimum amount of inventory they need to get through the day, and we wouldn’t need inventory management. But most business owners buy and keep more than the minimum because it protects them from unexpected events.
Keeping more inventory and goods than you need is like panic for your business. It allows you to:
Inventory management means knowing how much stock you have, when to order more, and at what price.
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Inventory takes up warehouse space, requires security and damage protection, increases insurance costs, and ties up money you could spend elsewhere. Inventory is expensive, which means you have to be careful what you order.
Go overboard and you’ll have less money to spend on other parts of your business.
Do too little and you’ll lose sales and customers when the product goes out of stock (customers usually don’t like it when the product is out of stock when they need it).
Order just the right amount and you’ll reduce costs, improve cash flow, avoid lost sales and make sure the products you need are always on hand.
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Good inventory management will look different depending on your business – a Michelin star restaurant will manage its inventory differently than, say, a hair salon or a car dealership. But there are a few principles that work across all lines of business.
You can’t manage your inventory if you can’t track it. Here’s how to make sure your investment information is accurate and up-to-date:
The easiest way to keep track of inventory is to set up a manual inventory or sales ledger. You can do this with most accounting software, a spreadsheet, or even a physical notebook.
Whenever you make a sale or purchase, record it in the ledger. At the end of the day, use the numbers in your ledger to update your investment totals. If you have a large company, you won’t be able to do this manually, but inventory management software can help (more on that below).
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Many small businesses still use pen and paper to track inventory, but popular POS systems such as Square, Vend or Lightspeed with inventory systems allow you to do much more.
A good POS system can integrate a barcode scanner (see below), process debit/credit card payments, print receipts, and streamline the entire checkout process for top sellers.
Most POS systems also come with a card scanner that allows you to accept card payments, send invoices and purchase orders, and offers advanced sales analytics tools.
Keep in mind that the inventory management systems that come with POS systems are often customized for different businesses. For example, Square has good all-purpose tools for different sales channels, Toast’s is good for restaurants, and Shopify’s is good for e-commerce.
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Manually entering sales into a general ledger or POS system can become tedious, especially if you run a retail business with a high volume of daily sales. Automatically scanning your products into your sales and inventory books using a barcode scanner can speed up the checkout process, reduce errors, and track inventory and make ownership automatic.
If your products don’t already come with pre-attached barcode labels, don’t worry: most POS systems have built-in tools that allow you to generate and print your own barcode labels, most of which are compatible with Bluetooth barcode scanners such as the SocketScan series from Socket Mobile and the Symbol CS4070 from Zebra. (If you’re going to be printing a lot of labels, Wirecutter has a great user guide for label makers that you should check out.)
Even if you use inventory tracking software and label scanners, you should still count them by hand from time to time to see if they match what the inventory tracking software says.
This involves manually going over your entire inventory, item by item, and making sure the numbers in your inventory records match the numbers in your warehouse / on your shelves.
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You’ll want to record a complete inventory well ahead of time, preferably for a period when there are no sales or deliveries, and ideally at the end of the year when your accountant needs an inventory valuation.
Instead of conducting the survey all at once, you can spread it out throughout the year and do one type of product at a time. For example, a pharmacy might check all their shoes one month, then all their shirts the next, and so on.
If you do an inventory or cycle count at the end of the year and notice that a lot of inventory is missing, you should start doing spot checks. This includes randomizing products and ensuring that reported stock matches actual stock. Ideally, you should focus your spot checks on the most expensive and fastest moving products.
If you’ve ever stocked shelves at a grocery store, you’re probably already familiar with FIFO. The FIFO method assumes that you sell all the oldest stock in your inventory first, before any new stock.
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For example: let’s say you run a small coffee shop that receives shipments of fresh coffee beans every Monday and Thursday. On Monday you get 100 bags of coffee, and on Thursday another 60 bags. You want to get rid of Monday’s bags first, so don’t put Thursday’s bags out until the oldest stuff is gone.
FIFO is most effective for businesses that sell perishable goods, as it reduces spoilage costs and is the most accurate way to measure the value of your inventory. But this also applies to companies that sell non-perishable goods. Boxes wear out, packaging designs change, and trends change. It’s a good idea to hand in old stock regardless of the type of business you’re in.
Having trouble dealing with slower moving inventory? Try giving your customers a discount, running promotions, combining it with new stock, selling it to a liquidator or even giving it away.
It’s been a few days since you officially opened your store, and business is booming. You have a proper inventory tracking system in place, so you keep a close eye on inventory levels. And the good news: you’ve just discovered that one of your most popular items is selling faster than you thought.
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After you’ve been in business for a few months, you should start to notice patterns in your sales data. You may find that certain products sell better at certain times of the week, month or year. Analyzing these patterns and trying to predict future changes in demand is one of the easiest ways to avoid making investment buying mistakes.
Reviewing the data in your inventory software (or your general ledger) can help you answer questions like:
The PAR level is the minimum or maximum amount of inventory that you have determined you need for a particular product. For example, in the restaurant industry, PAR rates refer to the amount of a particular food or drink you need for an average day’s sales.
How you set your PAR levels should depend on how quickly you turn inventory, how long it takes to reorder and restock, seasonal demand trends, and other information. any other questions you have about the sale.
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For example, let’s say you own a coffee shop and want to know the PAR rating for your dark roast espresso.
You go through about 30 bags each week and have found that a safety margin of four bags is enough to handle an unexpected increase in demand. You will also receive two deliveries per week.
This means that if the number of dark roast espresso bags falls below 17, your coffee shop will need to reorder to keep up with demand.
Although it requires some upfront work, setting PAR rates can save you a lot of time and speed up the long-term and overall process of buying your business.
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If you have many different products, spot checking and setting PAR levels can seem like a daunting task. But they become much easier when you separate low-priority supplies from high-priority supplies and decide which products need your attention the most.
(There are also low margin products with low sales frequency, but hopefully you don’t have too many!)
Products in the former category require more of your attention than the latter, as mis-listing has a greater impact on your business. If you don’t have time to make a full schedule or set PAR levels for each product, focus on high-priority products first.
Sometimes the best way to buy inventory is to handle it
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