load more

The essential inventory management guide for small businesses


This comprehensive guide shares all the tips and tricks small businesses need to take inventory to the next level. The journey to optimized inventory, greater accuracy, and scaling with more robust inventory management software starts here.

Inventory management for small businesses

Inventory management is part of the supply chain where an organization systematically forecasts, procures, stores, consumes, and sells inventory alongside other supply chain stakeholders. Over the years, most large companies have warmed up to employing cutting-edge inventory management systems. With the sheer number of products they move, it made sense for them to use tools to scale their operations and reduce inefficiencies. Even with some upfront investment in solutions, the long-term benefits proved beneficial to revenue and customer satisfaction.

A common misconception is that inventory management tools are only suited for large-scale companies. Today, there is enough data to show that small and midsize businesses (SMBs) stand to gain a lot by streamlining their operations using the latest technology.

One of the biggest reasons inventory management is crucial for smaller companies is the cost of carrying excess inventory. Additionally, businesses must react quickly to demand changes without carrying too much or too little inventory.

Thankfully, inventory management software is available that solves these small business challenges with solutions packaged and priced to suit an SMB’s budget. With inventory management software, small businesses can use inventory data and built-in reporting tools to predict future demand trends as well as integrations that allow a small business to add additional sales channels to increase revenue.

SMBs should seek cost-effective inventory management software that suits their specific operational needs and desired customer outcomes. With a powerful solution like Cin7 Core inventory management software, small businesses are poised for success.

In this guide we’ll discuss the key challenges, mistakes, and opportunities small businesses should consider when evaluating all things inventory management.

How does inventory management work for small businesses

As a small business, inventory management starts as an intuitive process – counting and tracking – but can devolve into a challenge as operations become more complex. Savvy SMBs should work to stay one or two steps ahead of any budding issues to be in a position to fully capitalize on high-growth phases.

Small businesses that have successfully scaled up their operations may be managing raw materials, semi-finished parts, and ready-to-ship products or managing inventory across multiple locations. As these challenges grow, it is time to dig deeper into inventory management solutions for small businesses.

Why is inventory management a challenge for small businesses

Simply put, inventory management refers to controlling the storage and usage of raw materials and finished products. This is supported by analog or digital systems, and it plays a pivotal role in an organization’s success. When SMBs have promising sales figures and are ready to scale, managing inventory needs to be a top priority.

Many small businesses approach inventory management with the paper-pen-calculator method or with spreadsheets. These solutions allow companies to manually record inbound and outbound materials with basic data and inventory tracking, but do not scale effectively as sales and business complexity increase.

Some of the common indicators of needing an updated, integrated approach to inventory management are:

  •  Lack of real-time visibility: If a business lacks real-time visibility into their inventory levels, they may struggle to make informed decisions, manage stock levels, avoid stockouts, and identify slow-moving or excess inventory.
  • Inefficient order fulfillment: If a business has difficulty fulfilling customer orders due to inventory shortages or misplaced items, it may need inventory management software. Inventory management software can help businesses track inventory levels and locations, ensuring that items are always in stock and easy to locate.
  • Excessive carrying costs: If a business has excessive carrying costs, such as storage fees or spoilage costs, they would benefit from inventory management software that will track inventory levels and identify slow-moving or excess inventory, reducing carrying costs.
  • Lack of integration: A business with multiple systems that do not integrate with each other would benefit from the integrations in inventory management software that connect systems such as e-commerce platforms and accounting software, streamlining processes and reducing errors.

If any of these problems sound familiar, it may be time to upgrade to a new inventory management solution.

Common small business inventory management mistakes

Here are some of the most common inventory management mistakes that small business face:

Spread across spreadsheets

Here’s the thing with spreadsheets: After a certain point, it becomes increasingly difficult to manage them. Businesses scaling up often find themselves entangled in multiple,cumbersome spreadsheets that restrict their decision-making and limit efficiency and accuracy.

It’s virtually impossible to automate the entire inventory process with spreadsheets. Businesses end up spending precious time manually updating sheets and double- or triple-checking data to ensure accuracy.

Compare this with a powerful inventory management software like Cin7 Core that allows inventory managers to automate redundant tasks. This improves data accuracy while freeing up time for teams to channel their energy into more meaningful activities. What’s more, inventory management software streamlines data visualization. No more staring at endless data trying to make sense of it all. The software analyzes the data and prepares various reports that lead to quicker decisions based on more accurate data and predictive forecasts.

Uniform stock levels

Inventory, whether in a store or warehouse, should always be based on expected sales numbers. If inventory levels aren’t a function of sales forecasts, inventory will either be overstocked or understocked.

Consider demand, shelf life, profitability, and return orders before determining inventory levels. These variables quickly become difficult to manage as SKUs or product lines expand – then there are outside factors such as global economics, seasonality, etc. An inventory management software solution considers every scenario and angle to give inventory managers a more precise picture of stock replenishment.

Irregular inventory maintenance

Inventory maintenance includes activities such as monitoring inventory levels, tracking inventory movements, and conducting regular checks to ensure that inventory is in good condition and ready for use.

By properly maintaining their inventory, businesses can avoid stockouts, reduce the risk of product spoilage or damage, and minimize carrying costs. Inventory maintenance goes beyond validating inventory counts and includes rotating inventory and conducting preventative maintenance.

Ignoring inventory shrinkage

Inventory shrinkage refers to the loss of products due to expiry, bad weather conditions, defects during transportation, etc. Shrinkage is a reality that has to be dealt with by regular inventory maintenance.

Companies that don’t monitor and manage shrinkage are likely to oversell their inventory. They may sell products they can’t deliver because of stockouts, damages, or obsolete products. This results in canceled orders, refunds, and returns – all resulting in disappointed customers.

Lack of dynamic pricing

Stock clearance is one of the most important ingredients to running inventory. Prices should reflect market demand. When prices are too high, companies risk not getting enough sales; price too low and some earned revenue will be left on the table.

How to implement inventory management as a small business

Often, companies worry about the implementation process and operational and order-fulfillment interruptions. This section shows how SMBs can implement world-class inventory management systems in simple steps.

Run a vendor audit

The first step in implementing good small business inventory management is to conduct a vendor audit. This involves categorizing vendors and suppliers based on the products they provide, including product names, SKUs, descriptions, costs at various purchase quantities, selling prices, reorder levels, and lead times.

It’s crucial to document all of this information in a format that can be easily imported into the new inventory management system, along with photographs of the products. Other important details to record include vendor company information, contact person details, payment and delivery terms, and billing cycle data.

Through the vendor audit, small businesses can identify any vendors that may cause bottlenecks in the supply chain. In these cases, it’s essential to clearly communicate the working terms and establish Service Level Agreements (SLAs) and Non-Disclosure Agreements (NDAs) to protect mutual interests.

Streamline ordering processes

Next, businesses should streamline the ordering process by evaluating consumption, storage capability, reorder levels, and lead times. Then, create proper purchase orders (POs) with fulfillment conditions clearly documented.

Simplified order processes can minimize miss-timed orders, ensuring businesses carry appropriate inventory levels with fewer manual interventions.

Implement proper QA and stock receiving protocol

When receiving shipments from vendors and suppliers, businesses need QA protocols to ensure that the items received meet requirements. This includes conducting random checks and verifying the shipping label details with the labels on individual cartons. Businesses that require further checks, such as destructive or non-destructive testing, should add these processes to QA workflows before accepting the delivery.

Once the shipment passes QA, the shipper and receiver should sign and keep copies of all necessary documents for their records. In circumstances where items will be resold, cross-docking may be needed to meet delivery requirements. When transferring stock to a warehouse, businesses should re-label items to match SKUs and internal identification methods. Frequently this is done using barcodes generated by the inventory management system.

Labels mark the date of receipt, batch details, and exact storage location. All of these details are required to properly trace and manage warehoused items.

Perform inventory counting

With inventory management software, small businesses receive status reports for each item in their inventory – including updates every time an item moves in or out. However, it is necessary to conduct good old-fashioned physical inventory counting. This helps cover incidents such as damages, misplacements, theft, and other issues. This can be approached in many ways, but the most widely used methods are cycle counting and ABC analysis.

Small businesses and barcoding

A barcode system assists any business, small or large, in managing its inventory. Barcoding saves a lot of time, money and also improves accuracy when managing inventory.

Key benefits of barcoding for small businesses

  • Barcode scanners check products faster and more accurately through automation.
  • Eliminates manual data entry.
  • Workers can instantly change pricing for the product display.
  • Functionality inside the software allows for product re-orders with suppliers.
  • Easy track sent invoices and received payment from the customers.
  • Scanners allow users to schedule maintenance, add product details, record shelf-life, and more.
  • Barcoding provides visibility into real-time inventory movements from raw materials to a product’s final distribution center.

How to Organize Inventory

Whether it’s computer chips, sneakers, produce, or any other item, effective organization is key to thriving in the “I need it yesterday” mindset of today’s customer. Efficient item location leads to quicker picking, packing, and shipping and less lost product.

Here are some key steps that will help organize inventory and make the most out of available resources.

BOM inventory documentation and vendor information

The first step to optimizing inventory is to thoroughly document all information regarding vendors and items. Creating a bill of materials (BOM) is a great starting point.
Be sure to include vendor prices, pricing policies, payment terms and conditions, lead times, contact information, and other information as required. It is also a good idea to include a vendor’s working hours and preferences for shipping partners.

Logging this information in inventory management software not only creates a reliable record for the entire team, but can also support time-saving automation for replenishment and other projects.

Label everything

Many inventory management challenges can be overcome with a simple barcoding system. Barcoding gives inventory managers an accurate way to see stock level. It also helps capture additional information such as inbound and outbound traceability, stock transfers, total time spent in storage, and shelf life.

Systematically arrange product and vendor information

Different types of businesses have different methods of managing their inventory. For example, some use manual tracking in spreadsheets. Retailers use point-of-sale (POS) systems. On the other hand, e-commerce businesses use order management systems. Businesses should organize inventory by setting up the stock and all the supplier information in a secure and accessible manner.

Here are common parameters often needed in databases such as a POS:

  • Name of the product
  • Internal product stock keeping unit number or code
  • Short description
  • Identifiers
  • Product category, class, or family
  • Regular retail price
  • Wholesale cost
  • Selling price
  • Colors and sizes
  • Reordering quantities
  • Product image
  • All the details of shipping, such as weight, box pack, etc.

Apart from the product-oriented information, it is vital to track all the information of the vendor or supplier. Therefore, most inventory systems contain vendor directory features to save contact information and tie all the products to a particular vendor.

The supplier information needed for tracking:

  • Name of the vendor
  • Contact Name of the vendor
  • Billing information of the vendor
  • Phone number of the vendor
  • Payment terms
  • Contact information for the showroom

Generate accurate purchase orders

POs (Purchase Orders) are the most straightforward method for managing the buying or procurement side of inventory. Businesses use POs to track every step of an order, including placing an order, shipment delivery, and payment.

Purchase orders document financial transactions. As such, businesses need POs to review cash flow and forecast stock requirements.

Purchase orders are often created electronically in a vendor’s internal system, but they can also be created through online ordering systems or even email.

Track inventory in real-time

Real-time inventory tracking enables SMBs to monitor inventory levels and fix anomalies before they become bigger problems. Spreadsheets that need to be updated manually cannot be used to monitor inventories in the moment-to-moment changes that happen daily. A powerful inventory management system is the best tool for real-time inventory tracking across all warehouses from receiving to shipping.

Monitor quality control

Quality control mechanisms should be implemented so that necessary checks and balances are applied across the inventory. Quality control goes beyond the quality of the product received, and should also include monitoring for inefficient workers and faulty technology.

Manual inventory counting

Small businesses with minimal inventory and resources often use manual tools for inventory counting. The two most common forms are pen and paper, and spreadsheets. With both of these methods, businesses run the risk of inaccurate and out-of-date inventory counts.

Limitations of manual inventory count

Physical counting
Perhaps the biggest limitation of manual counting is that SMBs have to take physical inventory counts. This activity is extremely important to keep inventory in sound health. However, it’s also heavily time-consuming, tedious work that is error-prone. Whenever possible, it’s more efficient and accurate to automate inventory accounting using a reliable inventory management system.

Communication Gap
When managing inventory manually, SMBs must take physical notes of all the key information and numbers. As the company grows and additional hands come aboard, it becomes difficult to maintain a hand-written ledger.

For example, one inventory worker may make an entry in his notebook as soon as replenishment stock is received. However, he may forget to inform the rest of the team or update the master ledger, leading to a discrepancy in the numbers. The team may think the item is still out of stock and even refuse sales orders, while the item has actually been replenished and is ready to be shipped.

What is inventory cycle count?

Inventory cycle counting is the process of tracking inventory by only checking a small part of it rather than the entire available stock. Companies prefer conducting cycle counts rather than full inventory counts because it’s faster and typically yields similar results. Cycle counting introduces some inaccuracy risk, but complete inventory counting is exhausting, resource-heavy, and slow. Businesses need to balance inventory accuracy and operational speed.

Inventory cycle count methods

There are various types and subtypes of inventory cycle count procedures. The key types include:

  • ABC analysis cycle counting
  • Process control group cycle counting
  • Opportunity-based cycle counting

Learn more About Cycle Count

Counting inventory using a POS system

When utilizing a POS-based inventory counting system, organizing inventory accurately before starting will set the team up for success and ensure the system has adequate data to structure inventory properly.

While doing this, remember to add as many details about the product as possible (such as the POS details we mentioned earlier in the article). Even if some of the details are seemingly obvious, they can be crucial in the future.

Read on for other useful information on inventory counting with a POS system.

Assign unique IDs to products
This is often accomplished by assigning stock-keeping unit (SKU) numbers to products based on where they’ve been stored. This makes it simpler for the POS system to locate the items.

Upload the data to the POS system
The POS provider may have support for this process, or information may be available in the POS manual. Most POS systems allow users to upload data using the CSV file format. Alternatively, it’s possible to enter the data into the POS software manually, but it’s not advisable. Manually entering the data is inefficient and also prone to human error.

Once the data is in the system, the POS software will automatically show the entire inventory along with the latest numbers. To check, a worker can pick a sample and verify the data.

After verifying the data in the POS is accurate, the inventory is ready to go.

Reconciling inventory differences: A 5-Step guide

In today’s fast-paced businesses, errors are going to happen. What sets winning businesses apart is how efficiently these errors are reconciled. Here, we review a few inventory reconciliation best practices to help SMBs stay ahead of the competition.

Step 1: Conduct a physical stock count

Earlier we covered various counting methods. Select a counting method that aligns with your business goals, and assign a senior team member (or multiple senior teammates) to help and oversee the counting process to increase the odds of an accurate count.

Step 2: Verify the physical count results against inventory records

The next step is to verify the results with inventory records. Look back on recent (reliable) records. This is a fairly simple process in inventory management software.

Step 3: Identify the discrepancies

After verifying the physical stock counts and expected inventory levels, the next step is determining the difference between the physical stock count and the records. After finding discrepancies, it’s time for some detective work to discover what went wrong.

This may include verifying purchases and sales records, talking to team members who update inventory counts, checking internal stock transfer documents, etc. Workers might also find undocumented items that need to be processed.

When resolving discrepancies, any of the following outcomes are possible:

  • Stolen items
  • Human error
  • Damaged due to improper storage
  • Faulty items supplied by the suppliers
  • Miscellaneous reasons

The items that cannot be found or are no longer fit for use are what the industry calls inventory shrinkage.

Step 4: Reduce inventory shrinkage

After identifying the cause of inventory shrinkage, the next step is to write off the damages. This is an important part of accounting and compliance, but should also lead to process improvements and new policies.

Step 5: Build an inventory reconciliation plan

After reconciling inventory, it’s the perfect time to reflect on how it went. What can be done to resolve discrepancies more efficiently in the future? Were there interruptions that can be minimized or avoided next time? Talk to managers and team members involved in the process to find the little things that add up to big changes. Also, consider the efficiencies that a cloud-based inventory management system brings to these scenarios.

Organizing inventory for small businesses

Organizing inventory is less of a science and more of a “Who has space in their garage?” scenario when SMBs start out. But as small businesses grow, optimizing space becomes increasingly important. Making popular items more accessible and creating faster pick flows are two big examples of a well-oiled warehouse.

Optimizing inventory and warehouse space can boost profitability by preventing stockouts, reducing unsold goods, increasing worker productivity, minimizing lost product, and more. While organizing inventory is a highly manual process, inventory management software helps. For example, inventory management solutions help identify trends such as popular items and items that are frequently purchased together (and would benefit from being next to each other in the warehouse).

Why automate inventory management?

Managing inventory involves a lot of resources and manual labor. Thankfully, many activities are fairly repetitive and can be automated with the help of a robust inventory management system. Doing this frees up time and energy so inventory managers can spend time on critical tasks or value-add projects.

Improve scalability

To achieve scalability with inventory, SMBs need to react quickly to demand changes in the market. This includes staying one step ahead of consumers in terms of the raw materials, fabrication, warehousing, shipping, and replenishment.

Automation allows businesses to monitor the demand by tracking sales numbers closely over time and identifying seasonality and other trends. Inventory management software analyzes data in real-time and enables inventory managers to run custom reports on demand to produce advanced analysis for more informed, strategic decisions.

Mitigate human errors

Even the most thorough manual processes will bump into human error.. This is why automation is encouraged whenever and wherever possible. Humans will never be entirely removed from inventory management, and that’s okay. But with automation, workers can focus on key tasks while leaning on automation to up the efficiency of error-prone tasks like data entry, scheduling, and more.

Improve customer service

Some of the most common customer grievances in the e-commerce space come from a lack of communication. Ordering an item that is actually out of stock or not getting timely updates about orders creates unnecessary tension that pushes even the most loyal customers away.

Inventory management software provides automation tools that improve the customer experience. For example, these systems can provide customers with valuable information throughout the ordering and delivery process through automated emails and alerts. This relieves the burden on customer service teams by reducing a significant percentage of service calls, emails, online chat requests, etc.

Inform purchases with analytical data

To maintain a healthy inventory threshold, SMBs need to stay ahead of demand and seasonality. The automated solutions provided by inventory management software help analyze trends in the data for faster and better raw material orders and replenishment. This includes running inventory analysis and comparing it against the production rate.

Leverage sales forecasting

As the name indicates, sales forecasting refers to predetermining how many sales small businesses are likely to make in a given timeframe. This can be done using multiple methods, including looking at past data and moving averages for trend-based predictions.

Always use reliable data. Bad data leads to bad decisions – some of which a small business may not be able to absorb. A classic example is the bullwhip effect, where overestimates in demand are exacerbated when partners and suppliers base their decisions on inaccurate estimations.

Perfect inventory consumption

Inventory management software helps prioritize raw materials consumed in production. For instance, consumables should be used before their end-of-life to reduce waste.

The same rule applies to all other stored goods, including returned items. Careful inspection needs to be performed before restocking a returned item, and clear processes are needed to ensure the reverse logistics and re-selling are airtight. These steps maximize the chances of recovering some of the lost profit from returns.

SMBs may also want to create SLA contracts with vendors and implement lean manufacturing concepts like just-in-time (JIT), depending on the supply chain’s flexibility.

Use software solutions for purchase-selling documentation

Lastly, we recommend SMBs transfer all purchase and selling documents to software systems, like their inventory management system. This allows businesses to follow all processes mentioned above accurately in addition to fueling better analytics, increasing traceability, and improving record keeping.

For example, inventory management software helps to automatically reorder certain items (designated by inventory managers) to reduce administrative workload. This streamlines many accounting processes and saves time. Integration with other systems, such as accounting software, brings additional synergies as well.

It’s time to step up inventory management

This guide covered many best practices SMBs can use to refine inventory management and keep up with larger competitors.

Small businesses need to evolve as they grow, but it all starts with the strong foundation covered in this guide.

Learn more about our leading inventory management software, Cin7 Core

Read to get started? Begin your 14-day free trial of Core today.

Inventory management frequently asked questions (FAQs)

What does inventory management software do?

Inventory management software is utilized to track all the levels of inventory, deliveries, and sales. But beyond that you can use inventory management software to build work orders, production-related documents, and bill of materials as well as integrate seamlessly with 3rd parties throughout our business processes from accounting tools like Quickbooks to selling platforms like Amazon and Etsy.

What is the main difference between inventory management software and a warehouse management system?

Typically, a warehouse management system (WMS) controls the storage and movement of materials in the warehouse, including managing and optimizing storing, moving, and tracking the whole inventory. On the other hand, inventory management software helps optimize how many products are required to keep in stock. Inventory management systems help maintain a whole record of the inventory and ensure that future demand for the product should be fulfilled.

What is needed to integrate inventory management software?

The three crucial things to consider are integration, data quality, and training. Inventory management software can integrate with existing systems, such as an ERP or accounting software. Cleansing, verifying, and formatting data for integration is crucial to ensure a smooth transition to inventory management systems. Lastly, it requires proper training before inventory managers and other workers start using the software.

What are the top inventory management software features?

  1. Inventory tracking: Inventory tracking is a key feature of inventory management software. This allows businesses to track inventory levels in real-time, helping them avoid stockouts and overstocking. With inventory tracking, businesses can also track product movement within their organization, including shipping, receiving, and transfers between locations.
  2. Demand forecasting: Demand forecasting helps businesses anticipate future demand for their products. By analyzing sales trends and market conditions, inventory management software can help businesses make informed decisions about how much inventory to stock, when to reorder products, and which products to focus on.
  3. Barcode scanning: Barcode scanning is a valuable tool for inventory management, as it helps businesses quickly and accurately track inventory movements. By scanning barcodes, businesses can easily update inventory records and track product movements in real-time.
  4. Reporting and analytics: Inventory management software provides businesses with powerful reporting and analytics tools, allowing them to track key performance metrics such as inventory turnover, carrying costs, and order fulfillment rates. With this information, businesses can make informed decisions about their inventory levels, optimize their operations, and identify areas for improvement.
  5. Integration with other systems: Many inventory management software solutions integrate with other business systems, such as accounting software and e-commerce platforms. This allows businesses to streamline their operations and automate key processes, such as order fulfillment and invoicing.