Do Small Businesses Need Inventory Management Software?
The global market share for inventory management software is set to cross $3 billion by 2028. If your business hasn’t already embraced this technology, you need to speed up the decision-making.
That’s because sharp fluctuations in supply and demand can put even the best inventory management strategies to the test. And if you’re relying on simply keeping excess stock as your inventory strategy, you’re probably not thinking about the losses you incur by doing so.
As per reports, the global supply chain wastes up to $163 billion worth of inventory in a single year. That’s 8% of all stock discarded annually due to incorrect demand predictions.
Thankfully, you can minimize losses when you implement robust inventory management software.
If you want to know how this technology will improve your business, this guide will clarify the key points to consider. Let’s jump right in to determine whether your business needs to subscribe to inventory management software.
What Is Inventory Management Software?
Inventory management software is a digital system or tool that automates various tasks involved in managing items. Most inventory management software can integrate with existing shipping and sales systems. This allows businesses to use the software to streamline their inventory processes and control the items going in and out of their storage facilities.
Software helps track and optimize inventory levels and analyze the data from various touchpoints to deliver business insights and make predictions. This helps meet customer demand and prevent losses due to stockouts or excess inventory.
In addition, these tools streamline tasks such as customer/vendor data storage and organization, reordering, etc.
Most inventory management software is cloud-based, so they take up very little space compared to traditional hardware systems. Businesses can subscribe to these software services on a monthly or annual basis as per their needs.
How To Know if You Are Successfully Managing Your Inventory
If you have a small business and have no trouble with your inventory, you don’t necessarily need inventory management software. Although it can still provide much-needed support, streamline your workflow, and boost your sales.
Here are some metrics that can help you assess your inventory management performance:
Inventory Turnover Ratio
The inventory turnover ratio helps businesses measure how quickly their goods go off the shelves. You can calculate inventory turnover by using the following formula:
Inventory turnover ratio = COGS / Inventory cost
Cost of goods sold (COGS) = Total purchases incurred for all inventory items over a certain period
Inventory cost = (Beginning inventory + Ending inventory) / 2
A high inventory turnover ratio is a good sign that you’re selling items quickly and not holding onto them for too long.
However, a low inventory turnover may indicate some issues in your ordering/production/sales strategy.
Measuring stockouts gives you a clearer idea of lost sales. The formula below will help you measure the number of times a product is out of stock within a given period.
To calculate stockouts:
Stockouts = Frequency of stockouts / Monthly sales volume
You can also switch the monthly sales volume to the annual figure to get numbers for the year.
You want your stockouts to be as low as possible. A high rate of stockouts indicates a significant amount of lost sales, leading to many dissatisfied customers.
Carrying costs refer to the expenses incurred for holding inventory. This includes storage costs, opportunity costs of purchasing inventory, software apps, facility maintenance, shrinkage/obsolescence, and insurance.
You can calculate carrying costs by using this formula:
Carrying costs = Cost of storage / Total annual inventory value 100
You should aim for carrying costs around 15% to 30% or even lower. Higher amounts mean you’re not optimizing your storage and organization or that you have too much inventory on hand.
Average Days to Sell Inventory (DSI)
Also known as days of inventory on hand, this metric measures the amount of time it takes for you to sell your items. You can calculate DSI by using this formula:
Average days needed to sell inventory = (Average inventory / Costs of goods sold) 365
Average inventory = Number of units your business holds in inventory
Cost of goods sold = Total amount needed to produce the goods in the inventory
A lower number means you’re selling your merchandise quite quickly, but too low means you risk running out of stock. However, if you’re selling fresh food items or ingredients, your DSI should be much lower than retailers in other niches.
Return On Investment (ROI)
ROI measures the profitability of your inventory, and you can use it to analyze how much of your profits to reinvest in your business.
ROI is measured in percentages with this formula:
Return on investment = 100
Analyzing ROI percentages is simple: the higher the ROI, the better your profitability. And you are all set for long-term business success.
Order Cycle Time
Order cycle time is a metric used to measure the time it takes to process an order from start to finish. It is an indicator of how well you’re managing your inventory.
You can calculate your order cycle time by using the following formula:
Order cycle time = (Delivery date – Order receipt date) / Total orders shipped
Ideally, you want a short order cycle time because it means your workflow is efficient and effective.
If these metrics fall short of the ideal numbers, you might need help managing your inventory.
But there’s no cause for worry! Once you’ve successfully implemented the best inventory management software, you’ll soon see an improvement in the metrics above—you’ll likely notice it in your daily processes yourself.
Signs Your Business Needs Inventory Management Software
There are plenty of ways a small business can benefit from implementing inventory management software. If you’re experiencing any of the issues outlined here, you may be in urgent need of a software system.
Frequent and Too Many Stockouts
Too many and frequent stockouts can be a massive blow to any business’ operations. First, a stockout leads to a poor customer experience. Second, it leads to a significant loss of revenue for the company.
It may be challenging to optimize inventory levels if you have a limited budget. Inventory management software can help you steadily optimize your inventory levels by predicting demand more accurately and streamlining your cash flow in the right areas.
Data Collection is Slow and Inaccurate
If your primary method of counting inventory is manual, you’re spending too much time on it. Moreover, manual processes are much more prone to errors, which can further obstruct and delay the smooth functioning of your operations.
Inventory management software can speed up the process by integrating with tools such as barcode scanners. And it can automate many time-consuming processes while reducing errors.
As a result, you can access timely and accurate data that you can put to good use when making decisions for your inventory. Your team also has more time to spend on complex tasks that will take your operations to the next level.
Inefficient Inventory Storage
If your inventory carrying costs are too high or constantly increasing, you need to optimize your existing stock levels. The main reason for this is often too much inventory that doesn’t sell fast enough.
The solution? Using inventory management software to order and keep only as much inventory as needed to meet existing customer demand.
Support for Scaling Needs
Spreadsheets and clipboards might have been enough for your scale of operations when you were just starting out. But if you’re planning for growth, you’ll need to scale your business tools, too.
You must consider automating inventory management tasks to handle the increase in inventory and sales while boosting the efficiency of operations.
Insights are Slow and Inefficient
Data-centric insights can be beneficial when making important decisions regarding your operations, inventory management, investments, etc. However, without inventory management software, you cannot analyze gathered data and quickly generate accurate, detailed reports for your internal teams to refer to.
Features of Inventory Management Software That Small Businesses Should Consider
The exact purpose and function of inventory management software can differ significantly due to differences in the size of operations.
If you’re a small business, here are some of the top features you’ll need to consider:
Make sure your inventory management software allows you to track your inventory levels, reorder points, and other vital details. Confirm whether the software system shows real-time updates as your inventory moves along the warehouse floor or storage area.
Purchase Order, Product, and Supplier Management
Your choice of software should also generate purchase orders based on available data. It’s best if all your supplier and product information is stored in one platform.
Furthermore, you should be able to track lead times with your software.
Inventory Data Analysis and Reporting
Software that analyzes your inventory data to predict demand will help you stay one step ahead. As a result, you can make purchase orders on time and have stock on hand when orders come through, ultimately improving customer satisfaction.
Ensure your system has built-in reporting capabilities for tracking margins, unit sales, and other critical inventory metrics and business KPIs.
Compatibility and Integration Capabilities
Barcode scanners, POS systems, accounting software—you probably already use several tools to operate your business. Your inventory software should integrate seamlessly with these to make the transition process much smoother and faster.
Inventory Management Software Pricing
The cost of inventory management software varies based on many factors, such as the number of devices, items to track, functionality, reporting ability, analytics, etc. There are also free options and free trials, so you can get a feel for the software before signing up for a subscription.
These software systems can cost around several hundred dollars annually to $150,000 or higher for international enterprises that need comprehensive and feature-rich solutions.
Beyond the immediate yearly/monthly costs, you should assess pricing transparency and predictability of costs when you are considering a vendor or solution. Are the costs and benefits advertised up front on site or do you have to work hard to get details on pricing? Is the current pricing easy to understand and how would pricing change in a year or two years’ time? Complex pricing matrices, promotion/price schedules, licensing and terms of service can make it difficult if not impossible for businesses to know costs a priori, plan spending budgets and control costs.
For your small business, you should be generally fine with a software system that costs a few hundred dollars per year based on your requirements. You may need to allocate a higher percentage of your sales volume when starting out. The percentage will fall as the business grows and costs are spread over a larger revenue base.
Nest Egg: Best Free Inventory Management Software for Small Businesses
Nest Egg is an excellent choice if you are looking for inventory management software that delivers top-quality features. There are free trials for all the plans and a free package for small businesses.
Apart from the usual inventory tracking tools, you’ll get a powerful dashboard, reporting tools, contacts organization, and world-class customer support.
We hope this guide has helped you gain a better understanding of your company’s needs for inventory management software. We wish you a successful business year with on-point demand predictions and the best ROI!
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