The Best Tips for Inventory Management for Small Business

The Best Tips for Inventory Management for Small Business

When you have a successful business, it’s important to be able to track and manage your physical goods, and inventory management will help you with that. Whether you’re just starting out or have been in the game for a while, good inventory management for small businesses will maximize your profits and minimize expenses. 

The goal of inventory management is to ensure that you have the products that your customers want and are able to deliver them without any trouble. If you don’t have proper inventory management, you’re running the risk of incurring unnecessary costs (just think of all those extra shipping and handling fees) and disappointing your customers.

So how do you deal with inventory management? The first step is to know what’s in-and out of stock with an accurate inventory management system. You can’t manage what you don’t understand! This article will teach you how to track inventory and avoid overstocks or understocks. 


1. Introduction: What is inventory management?

2. E-commerce inventory management

3. Importance of inventory management

4. What is an inventory management system?

5. What is the first step of inventory management?

6. What are the techniques for inventory management?

7. Benefits of inventory management

8. 5 common mistakes in e-commerce inventory management

9. How to improve inventory management

Introduction: What is inventory management?

Whether you have a retail store, an online store, or both, you need to understand inventory management. It’s crucial for businesses of any size to inventory their goods and merchandise so that they can keep them on hand and meet the needs of their customers.

Inventory management refers to the idle stock of physical goods that contain economic value, and are held in any form (such as raw materials, components, and finished goods) by an organization waiting to be packed, transported, or sold. 

Inventory management for small business works by tracking products, components and other items across all channels to ensure that the stock is used as efficiently as possible. 

Most companies underestimate how much they could be making every year if they just had better inventory management. But once you have a clear idea of what you have and what you need to stock up on, you can track your orders better and get paid on time, which is great for your bottom line. 

Types of inventory

Inventory comes in different forms. It can be raw materials that you buy from others to make something new, or just the products you’ve bought in bulk and now are selling individually.Let’s take a look at the most common types of inventory:

  • Finished goods – final products that are ready for sale. 
  • Raw materials – the inventory that you use to produce your finished goods.
  • Work-in-progress – the inventory that is going through the manufacturing process. 
  • MRO goods – the inventory you use to support the manufacturing process (maintenance, repair, operating).
  • Safety stock – the additional inventory you keep in store in case of shortages. 

Inventory management vs inventory control

In order to operate a company efficiently and keep track of stock levels, it’s necessary for companies to have accurate records of their inventory levels. The higher the inventory levels, the more you’ll earn as a business. The main difference is that inventory control is responsible for how you manage the inventory you currently have on hand – in storage. So, basically, inventory control is part of inventory management. 

E-commerce inventory management

Do e-commerce businesses need an inventory management solution? 


The days of buying items in bulk to have an extensive inventory on hand are over. Consumers expect fast deliveries, and they expect to see a full assortment of items in the store.

Having an e-commerce store can help you meet these expectations. Especially if you’re running your store from home

E-commerce inventory management is an important part of running your business, but there are a few ways to look at it. Inventory is broken down into product, stock and profit. The ratio between these will give you an idea of how successful your business is.

The two main formulas for e-commerce inventory management will be your Cost of Goods Sold (COGS) and Gross Profit:

COGS = beginning inventory + purchases – ending inventory

Gross Profit = revenue during particular period – COGS

Note: For e-commerce inventory management it’s recommended to do a periodic inventory so that you can have an accurate and complete view of what you have in stock. After that, you may try to expand your inventory. 

Importance of inventory management

Why is inventory management important? Do you remember that feeling when:

  • you wanted to sell your goods but didn’t have the stock to replace it? 
  • you had at least $200 worth of inventory in your warehouse that your business couldn’t make use of? 
  • You’re out of stock and losing money?

These are the reasons why it’s so important to have good inventory management for a small business. It’ll not only help you make a good profit but also prevent you from losing money.

Efficient small business inventory management gives you time to promote your products, which increases margin, and keeps you from missing sales. 

As a business owner, you need to know where you stand and make smart decisions. Fortunately, inventory management is the key. You can use it to keep track of your inventory and even maximize sales so that you can skyrocket your profit.

As large inventory carries the risk of spoilage, theft, damage, or shifts in demand, it’s really essential to have an accurate inventory management system. 

What is an inventory management system?

An inventory management system is a set of procedures, algorithms, and software that is used to track, manage, and report all items in stock or on order. It’s an essential tool for any company that wishes to keep track of its inventory, especially those businesses that deal in high-volume or perishables. Whether you’re running a small business or a large corporation, you’ll find that inventory management is a necessity to ensure that your company’s stocks remain accurate and up-to-date. 

An effective inventory management system will help to facilitate e-commerce inventory management by enabling businesses to track and analyze stock levels. It’ll help a company understand the demand for its inventory, manage the risk of having too much or too little stock, and stay organized and compliant with its accounting requirements. 

Periodic inventory management system

Periodic inventory management is a type of system where the inventory is managed in batches to reduce the cost, improve inventory turnover and reduce the risk of stock-outs.

A steady supply of goods and services not only keeps your business running smoothly, but it also prevents wastage and excess stock. So, by maintaining a periodic inventory management system, you’ll be able to focus on your core business rather than worry about maintaining stock levels.

Perpetual inventory management system

Perpetual inventory management is a business discipline that requires continuous and sustained efforts to reduce costs, increase accuracy and stay ahead of demand. This inventory management system helps the stores to monitor stock levels and spot stock shortages at the end of the day. It also helps the store keep track of the items that have been sold. 

It ensures that inventory levels are checked on a regular basis and the excess or shortage of goods is measured. The main advantage of using such a system is that it can help businesses save money, time, and resources.

What is the first step of inventory management?

The most common inventory management process includes five main steps:

  1. Delivery of the materials or items
  2. Receiving them
  3. Putting them away
  4. Manufacturing (if raw materials were delivered) or Distribution (if items were delivered)
  5. Shipping 

inventory management step by step

During these steps you also need to keep in mind all the important information (lot number, serial number, cost, quantity, dates for production/expiration/shipment) and timely update it  so as not to mess it up and save your money.

What are the techniques for inventory management?

Just-in-time inventory management

Just-in-time inventory management is a manufacturing process that eliminates excess inventory so that the company operates with a minimal stock of inventory. It’s one of the many inventory management techniques that help a company to keep its supply chain lean and avoid excess stock.

ABC inventory analysis

This type of analysis looks at your inventory in order to determine how much of what you have on hand is selling at a profit by classifying goods into different tiers. Inventory analysis can help your company better understand what’s selling well and what needs to be sold at a higher profit margin in order to offset the fixed costs and operational costs of maintaining the inventory.


The other part of the inventory management strategy is to sell products on dropshipping platforms that are focused on specific niches.  They usually handle all aspects of running an online store, such as product listings, payment processing, inventory management and customer service. 

They also offer a variety of services from software and consulting to managing inventory and shipping. This means you don’t have to invest your time and money in setting everything up yourself.

Bulk shipments

Bulk shipments take place when an exporter sells goods in bulk quantities rather than individually. This way, the exporter doesn’t have to worry about a customer coming by to buy just one thing—they can sell the entire batch wholesale at a cheaper price.

Instead of a shipment being sent from one location to another, bulk shipments are sent from one place to another in a different kind of shipping container, known as a bulk carrier.

Cycle counts

The cycle count is an inventory management technique used to keep track of how many times an item has been used during the course of a day’s operation. The count starts with the first time the item is used for its intended purpose. The count then increments every time the item is used for any other purpose.

The cycle count technique is a method that can help you keep tabs on your inventory and reduce the cost of maintaining it. 

Benefits of inventory management

Forget about missed sales

With proper inventory management, you can see right away when the top-selling items are running out of stock so you can react quickly and restore these goods in time. 

Plan your money investment

As your business grows and you begin to add new inventory, you might be worried about inventory issues. The key to good small business inventory management is to keep track of your stock so you know exactly when it’s needed, how much you have, and whether it’s available for purchase. If you know which products are selling best, you can invest in them in the future instead of spending money on unpopular products. 

Identify issues quickly

When you keep an eye on your inventory levels, it’s easy to identify errors or issues inside your warehouse. The earlier the problem is identified, the better so you can take action to resolve it. 

Skyrocket during peak seasons

Forewarned is forearmed. When you already know which products sell best during the holiday season, you can order them beforehand and never worry about running out of stock and messing up your inventory management. 

Make reordering as simple as possible

When you manage your inventory efficiently, you can implement some additional triggers that help customers to reorder their previous purchase. Plus this trigger may automatically replenish the sold items with new ones so you never have to worry about being understocked. 

5 common mistakes in e-commerce inventory management

There are a number of common mistakes you can make when integrating an inventory management system into your e-commerce business.

Let’s have a look at the top five errors that most business owners make:

Mistake #1: Overbuying

As a business owner, you need to keep an eye on all your sales. This way, you can know what you’re selling and why

However, there are some things you have to consider before putting the system in place. 

Mistake #2. Not Using Long-Term Inventory

Before you start getting a bunch of inventory, think about its life expectancy and how much of your inventory you should be keeping in store for future sales. A good way to determine this is by checking the minimum and maximum sales of your products, planning your inventories accordingly and keeping a proper inventory management. 

The last thing you want to do is start keeping inventory and find out that your products are outdated or out of stock.

Mistake #3. Buying Bad-Quality Goods

Although there’s a huge variety of quality goods and services available on today’s market, you should be careful in the choice of dependable vendors, especially when you’re a new or growing business. That’s because purchasing bad-quality goods will significantly lower your profit margin and affect the quality of your products.

There’s one way to spot good quality goods: look for companies that have a track record of success and a long list of satisfied customers. A company that has proper small business inventory management and positive feedback is a good choice for business purposes.

Mistake #4. A Lot of Storage Sites

Do you really need that many? Increasing space for inventory without facilitating your items themselves or the service won’t lead you anywhere. 

Even if you’re able to fill all the shelves, this only means that you’ll have much more work to do. Therefore inventory management will become more difficult and may potentially lead to more errors.

Mistake #5. Trying to do everything by yourself

Most small businesses buy software for inventory management. Some set up their inventory on an Excel spreadsheet. What they probably don’t realize is that they lose quite a bit of the data they’ve been working so hard to build up. 

To prevent all these mistakes and grow your business smoothly and successfully, it’s recommended to give some technologies a try. Specialized software will help you with all the inventory management processes and will simplify your business workflow.

How to improve inventory management

Support your process with technology! The best way to ensure that you have a successful inventory management process is to use the technology that works for you

Not all of the software for inventory management can provide you with all the necessary information. That’s why you’re going to need to understand different features that your software has.

How to choose the right software for inventory management for small businesses?

The best way to choose inventory management software is to ask yourself a few important questions. For example, are you looking for a way to make your inventory costs lower or are you looking for a way to keep an accurate record of sales

The reason is simple – it can cost you a lot more if it isn’t accurate. Most inventory management software applications don’t use barcode scanners. So if you don’t make accurate inventory records, you have to manually input each and every item on your shelves.

Learn about some profitable variants of software for inventory management for small businesses in our blog post Top-7 small business inventory software solutions.

Bottom line

Although you might not think of inventory management as an essential part of running a business, it’s important in this day and age. 

Keeping track of your inventory is vital to your success as a business owner. Investing in reliable inventory software is a good way to get a handle on what you have and what you need.

Customers are buying products faster than ever, which makes it difficult for you to keep tabs on everything. Here are three main reasons why you need to use software for inventory management: 

  • Inventory management software gives you a better understanding of your sales and profits. 
  • Inventory management software allows you to manage inventory more efficiently.
  • You’ll be able to access your historical and current inventory data and manage it  from one easy-to-use interface. 

Thus, you’ll be able to get a clearer idea of what items are selling better, which will help you plan ahead and make strategic financial decisions.

Having an accurate and precise inventory will provide you with peace of mind and a plan of action for upcoming seasons.

Anastasia Su

Anastasia Su

Anastasia is a FinTech writer with experience working as a freelance writer for small business owners. She has participated in numerous events dedicated to business management and marketing. Anastasia is inspired by the fact that each successful business is a result of proper structuring so she tries to analyze every step and wants to share her observations with others.

1 Star2 Stars3 Stars4 Stars5 Stars (3 votes, average: 5.00 out of 5)

Add comment