Are you an aspiring entrepreneur who’s about to launch a small business? Suppose you’ve recently acquired a physical space and transformed it into the record store of your dreams, complete with vinyl listening stations and the Patti Smith-era vibe you love.
You’ve thought of all the little things, but have you considered: inventory management for small business owners?
At Ceterus, we understand how important it is for small business owners like you to have a clear understanding of your inventory needs, effective tracking, and timely restocking for success. We’re financial experts in your industry who’ll provide the information you need to manage your business confidently.
Inventory: What Is It?
Your inventory is the goods and materials your company has on hand. This can also include raw materials used in manufacturing finished products, the finished products themselves, or even items that are purchased for resale.
For instance, a record store’s inventory might include new vinyl purchased from music distributors. In comparison, the inventory at a movie theater could be the popcorn and snacks bought in bulk for screenings.
Your inventory is often one of your most valuable assets as a small business owner. Maintaining a balance between meeting demand and avoiding overstocking is crucial since you want to avoid needlessly tying up your finances.
Cost of Inventory
Be sure to take into account all the costs involved in inventory. This includes expenses for obtaining, storing, and maintaining the product until it’s sold. There are also several elements of inventory costs to take into account too, like:
- Direct expenses – these are the expenses of purchasing or procuring the stock to sell, also known as the cost of goods sold (COGS).
- Indirect expenses – referred to as carrying costs, are connected to storing inventory. These are warehouse fees, as well as the insurance you need to take out to safeguard the stored products.
- Shortage costs – these refer to the loss of sales due to understock. Customers may look elsewhere to fulfill their orders if your supply doesn’t meet your demand.
- Obsolete costs – these expenses occur from unsold or wasted products that cannot be resold or returned to recover your investment.
Inventory Management: What Is It?
Now inventory management is all about understanding and tracking:
- How much stock is in your possession
- When to order more
- What the sales trends are
It also involves maintenance, repair, operating supplies, storage, packaging, sorting, and rotating stock.
Inventory Management for Small Business Strategies
How you manage your inventory will depend on your small business, but ultimately, there are a few critical parts of inventory control across all industries.
Track & Organize Inventory
Stay on top of your stock levels by manually tracking on an inventory ledger or using an integrated point-of-sale system—record data related to stock, supplier and shipping details. You’ll need the following from your vendor or order sheets:
- Product name
- Product quantity
- Product code/article number
- Vendor name
- Price (wholesale)
- Payment terms
- Quantity for reorder
- Weight and size for shipping
- Expiration date
- Colors & pictures
Pro Tip! Assign a barcode to each product and utilize a POS system to help quickly track and update information. Having this data at your fingertips helps cut down on time spent finding products and eliminate human error that’s prone to happen when manually updating spreadsheets.
Organize your inventory into groups based on its value to help your inventory control. Many businesses use the ABC analysis. Using this approach involves counting the items deemed in higher value most often.
- A = high-value/high-demand/highest-profit items (top 20%)
- B = items that drive some profits but are in typical demand (middle 60%)
- C = products don’t drive profit but are still important to your business (low 20%)
Sorting this way lets you prioritize your business efforts effectively, focusing on managing high-value A items and making data-driven decisions about stock levels and order quantities.
Audit Stock Frequently
Manually checking your inventory is inevitable, even if you use software to track and organize everything. But that’s ok. There are a few different ways to approach your manual audit.
One approach is cycle count. Cycle counting is when you audit your product one at a time throughout the year.
Another is a year-end count. This means going product by product, matching inventory counts with what’s on the show floor or in the back/warehouse.
Lastly, we have spot checks. Spot checking is checking an item randomly to see how much is left in stock. These spot checks are typically done on fast-moving products. So if you own a record store in Seattle, you’d be spot-checking The Foo Fighters regularly.
Find The Right Inventory Accounting Method
Inventory accounting methods help you assess your COGS and, ultimately, your profitability. The most common method is FIFO (First-In, First-Out).
With FIFO, you assume that the oldest items you purchase are the ones you sell first, following a “first come, first served” approach. This is particularly useful for goods with expiration dates or those that might become obsolete over time.
Pro Tip! Using the FIFO method can minimize your cost of goods sold and increase taxable income. It also helps maintain a strong balance sheet.
Forecast Customer Demand
Study sales data, market trends, and customer preferences to predict demand accurately. Think about the next quarter and consider fluctuations in the seasons of your business or even the busiest time of the week when your top items sell out.
To better predict inventory status, keep the following in mind:
- Inventory Turnover: It measures how quickly a business sells its inventory within a specific period, indicating the efficiency of inventory management.
- Sell-Through Rate: The percentage of inventory sold within a given timeframe indicates the product’s popularity and demand.
- Economic Order Quantity: It determines the optimal order quantity that minimizes inventory holding and ordering costs, striking a balance between stock availability and cost efficiency.
- Days Inventory Outstanding: It calculates the average number of days for inventory to turn into sales, indicating inventory liquidity and potential cash flow issues.
Doing this helps you keep your inventory accurate and make informed decisions about how much inventory to order and when to restock, avoiding frustrating stockouts or wasteful overstocking.
Determine the best time to reorder by considering supplier lead times, fluctuations in demand, and desired safety stock levels.
What is safety stock? Simple. It’s buffer stock ensuring you have enough inventory without unnecessary delays or excess supply.
Pro Tip! Establish periodic replenishment (PAR) levels to save time and streamline reordering for your business. PAR levels are the minimum or maximum number needed for a product. These levels depend on how quick your stock turnover is, reorder times, and fluctuations in demand.
A good way to figure out PAR levels is to use this equation:
PAR Level = (Weekly inventory turnover + Safety margin) / Deliveries per week
Nurture Supplier Relationships
Build strong relationships with your suppliers if something arises. Start by making payments on time, being open with communication, including them in decision-making, and treating them respectfully. This will be key to earning their trust and help you negotiate favorable terms, such as competitive pricing, flexible order quantities, and reliable delivery schedules.
Let’s take a moment to understand how employing all of this for effective inventory management for small business owners like you will directly affect gross margins and overall profitability.
When you optimize your inventory levels and improve how quickly you sell your products (inventory turnover), you can reduce the costs associated with storing excess inventory. Doing so frees up capital that can be used in other areas of your business or invested for growth, leading to better financial health.
It’s crucial to find the right balance between inventory levels and customer demand to maximize your profit margins, as this helps you avoid running out of stock or holding onto items that may become obsolete.
So, by implementing efficient inventory control strategies, you can significantly impact your business’s bottom line.
The Ceterus Advantage
Think of Ceterus as your trusted partner who’ll handle your books, tax prep, and gather financial insights. We deliver clarity around your financial performance, providing the information you need to manage your business.
- Franchisor Requirements
- Inventory Management
- Cash Flow Fluctuation
- Sales Tax Compliance
- Better Management with Benchmarking
Get in touch with one of our financial experts at Ceterus to schedule a consultation today.