Inventory Management 101: How to Manage Small Business Inventory

OpenCart Retail Inventory Contribution

It’s important to evaluate your business on a regular basis to ensure that you’re on track to succeed. One of the most integral part of your business is inventory management.

How has your small business’s inventory management panned out? Have you had the right products available when you needed them? Did you lose out on business when items were out of stock? Or did you lose money due to excess stock?

Inventory management is a key part of running your small business. And now, the OpenCart and Square integration supports inventory management, to help you stay on track. Here’s a few more inventory management techniques and tips and tricks to best manage your inventory.

What is inventory management?

Inventory management is the part of supply chain management that aims to always have the right products in the right quantity for sale, at the right time. When done effectively, businesses reduce the costs of carrying excess inventory while maximizing sales. Good inventory management can help you track your inventory in real time to streamline this process. Examples show that even churches use church management software with inventory management features to keep track of their inventory, showing that it can be used in many situations besides businesses.

By effectively managing your inventory you can have the right products in the right quantity on hand and avoid products being out of stock and funds being tied up in excess stock. You can also ensure your products are sold in time to avoid spoilage or obsolescence, or spending too much money on stock that’s taking up space in a warehouse or stockroom.

Good inventory management software should:

  • Reduce costs, improve cash flow, and boost your business’s bottom line

  • Track your inventory in real time

  • Help you forecast demand

  • Prevent product and production shortages

  • Prevent excess stock and too many raw materials

  • Allow for easy inventory analysis on any device

  • Be accessible right from your retail point-of-sale (POS) system

  • Optimize warehouse organization and precious employee time

  • Offer quick and painless bar code scanning to speed up intake

  • Allow for multilocation management, tracking inventory across several locations or warehouses

Inventory management techniques and best practices for small business

Here are some of the techniques that many small businesses use to manage inventory:

  1. Fine-tune your forecasting. Accurate forecasting is vital. Your projected sales calculations should be based on factors such as historical sales figures (if you sell with Square, look to your online Dashboard for this info), market trends, predicted growth and the economy, promotions, marketing efforts, etc.

  2. Use the FIFO approach (first in, first out). Goods should be sold in the same chronological order as they were purchased or created. This is especially important for perishable products like food, flowers, and makeup. A bar owner, for example, has to be cognizant of the materials behind the bar and apply FIFO methods to improve bar inventory. It’s also a good idea for nonperishable goods since items sitting around for too long might become damaged, or otherwise out of date and unsellable. The best way to apply FIFO in a storeroom or warehouse is to add new items from the back so the older products are at the front.

  3. Identify low-turn stock. If you have stock that hasn’t sold at all in the last six to 12 months, it’s probably time to stop stocking that item. You might also consider different strategies for getting rid of that stock — like a special discount or promotion — since excess stock wastes both your space and capital.

  4. Audit your stock. Even with good inventory management software, periodically you still need to actually count your inventory to make sure what you have in stock matches what you think you have. Businesses use different techniques, including an annual, year-end physical inventory that counts every single item and ongoing spot-checking, which can be most useful for products that are moving fast or have stocking issues.

  5. Use cloud-based inventory management software. Look for software with real-time sales analytics. Square’s software connects directly to your point of sale, so your stock levels are automatically adjusted every time you make a sale. Receive daily stock alert emails so you always know which items are low or out of stock so you can order more in time.

  6. Track your stock levels at all times. Have a solid system in place for tracking your stock levels, prioritizing the most expensive products. Effective software saves you time and money by doing much of the heavy lifting for you.

  7. Reduce equipment repair times. Essential machinery isn’t always in working order, so it’s important to manage those assets. A broken piece of machinery can be costly. Monitoring your machinery and its parts is crucial to understanding its life cycle, so you can be prepared before issues arise.

  8. Don’t forget quality control. No matter your specialty, it’s important to ensure that all your products look great and are working well. It could be as simple as having employees do a quick examination during stock audits that includes a checklist for signs of damage and correct product labeling.

  9. Hire a stock controller. If you have a lot of inventory, you might need one person who is responsible for it. A stock controller processes all purchase orders, receives deliveries, and makes sure that everything coming in matches what was ordered.

  10. Remember your ABCs. Many businesses find it helpful to have tighter controls over higher-value items by grouping inventory items into A, B, and C categories.

Products classified as A — big-ticket items — make up the smallest percentage of inventory and have the largest annual consumption value. Products grouped into the C category — the least expensive items — make up the largest percentage of inventory and have the lowest annual consumption value. B products are in between. Annual consumption value is annual demand multiplied by an item’s cost.

The chart below shows (based on recommendations from Lokad) how businesses can break this down:

ABC Inventory Analysis Example


Percentage of inventory

Annual consumption value











Tips for businesses who make their own products

Some businesses own their whole supply chain — such as a producer and seller of handmade messenger bags.

Rather than sourcing finished products from other vendors, your business sources raw materials, which you then turn into items to sell. Inventory for these kinds of businesses usually consists of three categories:

  • Raw materials used to make products

  • Work-in-progress pieces

  • Finished products

In 2001, networking equipment giant Cisco learned the hard way what happens when supply outpaces demand. It wrote off $2.25 billion in raw materials and equipment components as a loss. One of the key factors for the loss was that Cisco’s inventory management modeling was way off and it poorly forecasted its sales figures.

Tips for retail businesses

Even if you aren’t a multinational business, good retail inventory management can help you save your business a ton of money. While it can be tempting to buy merchandise in larger quantities to take advantage of vendor discounts and free shipping, having excess stock isn’t always good for the bottom line.

Excess stock is problematic for a few reasons. To start with, you don’t want too large a portion of your business’s funds to be tied up in merchandise, and you could risk losing money if you’re not able to sell the products in time. (This is especially true for seasonal products. Ask any business owner who tries to sell Christmas ornaments after the 25th. Consumers naturally expect heavy discounts and you might sell at a loss if you sell the items at all.) Additionally there are costs associated with storing excess stock.

On the flip side, having too few of an item on hand can lead to a loss of potential customers. Imagine customers go to your brick-and-mortar store only to discover that their favorite product is out of stock. If you think they’ll just come back when the product is in stock, think again. A study of German consumers by GT Nexus found that 63 percent of shoppers who encountered out-of-stock inventory chose to buy the product from a competitor or didn’t buy it at all.

Reconciling lost, damaged, or stolen items

A reduction of inventory in a retail store is often referred to as shrinkage. The average shrink percentage in the retail industry is two percent. And in 2016, shrinkage cost retailers more than $49 million in losses, according to the National Retail Security Survey on retail theft.

There are four main categories of inventory shrinkage due to loss and theft. According to a 2014 study, shoplifting accounts for 38 percent of retail shrinkage, employee theft accounts for 34.5 percent, paperwork errors make up 16 percent, and supplier or vendor fraud accounts for seven percent. Some experts also have a fifth category that encompasses all unknown reasons for inventory loss; it makes up six percent of all inventory shrinkage.

When goods are damaged they are also included as part of shrinkage. The damage may happen while en route to your store or in the store itself.

However it happens, shrinkage is a very costly problem for retailers and can result in a loss of profit. And it’s a double hit — you can’t recoup the cost of inventory and you can’t sell the inventory to make revenue.

To cover these potential losses, you might increase the prices of your goods, passing the cost to your customers. But that can backfire if customers are price sensitive. You might also need to increase processes that stem theft and loss — like security — which ups your overall budget.

While shrinkage is something that you need to factor into your bottom line, you don’t have to simply absorb it as a cost of doing business. It is advisable to talk to your tax adviser to understand if you can deduct the casualty and theft losses related to inventory on your personal or corporate tax return.

About Square

Square creates tools that help sellers start, run, and grow their businesses. Square enables sellers to accept card payments and also provides reporting and analytics, next-day settlement, and chargeback protection. Square’s point-of-sale software and other business services help sellers manage inventory, locations, and employees; access financing; engage customers; and grow sales.