A beginner's guide to inventory management

There are many factors that can make or break a small business in its first 12 months, and inventory management is one of the most crucial.

Inventory management is the system a business uses to keep track of those items, right through from ordering and storing to selling. A business that has an effective inventory management system will have the right stock on hand, in the right quantity, at exactly the right time. Good inventory management practices can save your business from having funds tied up in excess stock or having to pay for storage space. It also means you're in a better position to capitalise on sales, and in turn, drive profits.

Inventory management techniques

The way you manage inventory will depend on the size and stage of your business. For those starting out from home, the living room or spare room often doubles as your 'warehouse' and this can prove difficult for several reasons. For Dee Honey, who runs her business Sinchies Sth East Melbourne from home, the greatest challenge is keeping her product safe and out of reach of her three children.

"I sell reusable pouches that are great for kitchen storage and things like baby food, but working from home with a young baby and two school age children means I constantly have to ensure the product is kept somewhere safe that little hands are not going to get into."

Honey says she uses an Excel spreadsheet to keep track of her stock on hand and orders most of her product in bulk when supplies run low.

Bulk ordering is one of the many inventory management systems in practice. Here are several other commonly used techniques:

  1. Just in time. Using this system, you place orders for new stock, such as yoga mats or clothing, right before they are required. It helps reduce waste and saves on storage costs but can be problematic if your supplier is delayed and can't deliver stock on time.
  2. Forecasting. This system relies on educated guesses based on previous sales figures as to how many sales you're going to make over a period of time. You then use that information as the basis for your stock order. If you're a new business without this kind of data, it can be tricky to guess, so always err on the side of caution and order small quantities. Emma Moulday, owner of Yoga Flame faced exactly this situation when establishing her yoga studio eight years ago. "We ordered very small amounts of mats and props to start with, until we knew what would sell. We were very cautious as we didn't want too much money tied up in stock that wasn't moving," she says.
  3. First in, first out. This is where goods are sold in the same chronological order as they were purchased. It's especially useful for perishable items such as food, but can be used for any product you don't want sitting around for a long period of time, either because it's vulnerable to damage, or it runs the risk of becoming obsolete, such as a football scarf commemorating a team's recent win. First in, first out can be easily achieved by placing newer items at the back of a warehouse, storage room or even on shelves.

Good inventory management practices are important but require dedicated time and effort to maintain

Good inventory management practices can save your business thousands of dollars but require continual time, effort and checking.

Inventory management challenges

One of the most common challenges to inventory management is having an over or under supply of stock. An oversupply of stock costs money as it takes up space and requires storage and maintenance. It also ties up capital you could be using for marketing or other business costs, and there's a chance of having a product that will never sell.

Belinda King from Romano's Hotel in Wagga Wagga, NSW, faced this problem of over-supply recently. In taking over the hotel from its prior owners, King was left with large quantities of liquor the business wasn't planning on retailing. "We've had to get creative to clear out some of the stock we inherited and don't plan on continuing with," she says. "We added various cocktails and specials to our menus to wear it down, rather than waste it or leave it sitting around, taking up space."

At Yoga Flame, Moulday has also faced the challenge of over-supply, having just discounted a number of items to help move them off the shelves.

"We recently had some protein balls that were close to expiry so had to discount them before we had to throw them out. Another was some body products. They sold very well for a while, but then I think the novelty wore off and we were left with a lot of stock that wasn't selling. So we have moved them by discounting."

According to Rob O'Byrne, group managing director of Logistics Bureau, an over supply of stock that's been purchased at a discounted price is a common problem among small businesses, and something for owners to be savvy about when ordering.

"Don't be overly ambitious in chasing low cost products from suppliers," he says. "They might offer you a bulk discount if you buy 100 units or 10 per cent off. But you have to be really certain you're going to sell it, otherwise that 10 per cent off isn't worth it if you're left with half the products and have to write them off."

On the other hand, an undersupply of stock can be equally problematic. Order too little and you may run out of stock, missing out on potential sales. Being unable to serve your customers can be damaging to a small business that relies on customer confidence and loyalty: a study of German consumers by GT Nexus found that 63 per cent of shoppers who encountered out-of-stock inventory chose to buy the product from a competitor or just didn't buy it at all.

Another inventory management challenge is just how difficult it can be to predict demand. Internal issues such as stock delays, new products and inaccurate record-keeping can impact inventory, as do the changes outside of your control, like market demand. Business owners need to be one step ahead, constantly looking at trends and having contingencies in place for the unexpected. This kind of inventory analysis is time-consuming but can be done efficiently with the help of inventory management software, such as Trade Gecko or Xero.

Tools of the trade

Inventory management systems have come a long way since cards, ledgers and even Microsoft Excel spreadsheets were used to track the movement of goods. There is now a range of accounting and specialist inventory management software available and according to O'Byrne, these new tools are making the lives of small business owners much easier.

"Small business owners still face the same traditional challenges of getting sales and decent market share and managing costs, but I think the developments in software and the ability to integrate things like apps means the backend operations are getting a lot easier. Using a software product to help manage inventory is far more efficient and much more accurate," he says.

The exact nature of your business will dictate which inventory management software is best for you. For Moulday and Yoga Flame, there was really only ever one choice. "We use MindBody, an online software package that manages all aspects of our business - class bookings and scheduling, staff payroll, online purchases, inventory management and more. Most yoga studios use this software so it's easy for our staff, they are familiar with it if they work in other studios. It automatically adjusts items in inventory, I can adjust prices easily and it gives a lot of reports that make stocktake and sales analysis very easy."

At Romano's, King and her fellow owners chose to use Bepoz, a point of sales system that encompasses all of the hotel's orders, payments and reporting. "Bepoz allows our management and staff to be across all inventory aspects and is widely used in the hospitality industry," she says.

When it comes to choosing an inventory management software product, O'Byrne recommends small business owners do their homework and look at what other businesses in the same industry are using.

"There's a whole raft of different products you can use, and they literally change by the week. Google is a great starting point, as are your fellow small business owners. If you're going to use a specialist software tool, start by reference checking it. Search around and talk to others who are using it, see what the feedback and reviews are like, as you also have to learn how to use it, maybe you have to train your staff to use it, and that's another cost to consider. You want to make sure you're getting the right one."

What to consider when selecting an inventory management tool

1. Can you customise the software to fit your needs?

2. Does the software integrate with your existing applications?

3. Is the software scalable, in that it will grow as your business does?

4. Does the software offer built-in formulas and functions to help you predict sales and demand?

5. Can you scan barcodes and keep track of units to minimise data entry?

6. Is the software easy to use, for both you and your team?

7. Can you trial the software before having to commit to purchasing?