Small Business 101: The Importance of Managing Inventory
October 7, 2021
It is common to find small business owners who think that their inventory does not need to be managed. Since the business is still small, many prefer to put efficient inventory management systems on the back burner.
While you may think that manually managing your inventory or eyeballing it right now is a good choice for your business, the exact opposite is true. Many financial and systematic repercussions could arise when your inventory is not managed.
To help you get a clearer picture, we’ve listed everything you need to know about managing your inventory as a small business and why you should do it.
What Is Inventory Management?
Managing your small business inventory involves four steps: ordering, storing, using, and selling.
Typically, this cycle is followed through an endless loop. However, when something goes wrong – for example, inventory gets mismanaged and you fall short – then you might run into a number of problems.
First and foremost, logistical issues could arise. If you are unable to fulfill your customer’s order on time, then you could lose a customer. You might argue that you’ll offer them a refund instead. Unfortunately, this could impact their first impression of you as a company – reducing the chances of developing a good relationship with them. Long story short, you might lose a customer.
Financial discrepancies are soon to follow. Not only will slow-moving stocks impact how quickly you make your Return on Investment (ROI), but they could also impact the costs of maintaining your inventory.
Many warehouses charge a specific cost for a specific number of products. In some cases, you may even be restocking certain items and back-ordering them with the notion that you are out of stock, when in reality, there are a bunch of unopened boxes sitting in a corner of your warehouse – waiting to make you money.
Why Is Managing Your Small Business Inventory Important?
Congratulations! If you’ve come this far, it means your business has scaled up. You no longer have full control of your inventory, and manually checking your stocks has become nearly impossible.
Despite how scary it might seem, at this stage of your company, professionally managing your small business inventory becomes a necessity. Here’s why:
Streamlining Customer Service
Making sure you have the right stocks listed on your sales channels is crucial to great customer service. After all, you don’t want to disappoint your customers by listing items that are no longer in stock. Not only will you give off a bad impression – but it also adds an unnecessary inconvenience.
First, you’ll need to facilitate a refund. After that, you’ll need to make sure you’ve eased their disappointment by offering something in return – like a discount voucher or a free item.
Furthermore, having a solid inventory management system is also essential in gathering data regarding demand. If you have backorders on your sales channels, then you’ll be able to keep track of when your stocks are replenished to keep waiting customers notified.
Minimizing Theft and Lost Inventory
Without the correct system in place, you might not be aware that some of your stocks are missing. Usually, this happens when you start hiring employees.
While you do not want to think ill of your future team, such instances cannot be avoided. According to the National Retail Federation’s 2021 National Retail Security Survey, just over 88% of all retailers lose considerable income percentages through shrinkage loss. This encompasses revenue lost through employee theft, cashier errors, shoplifting, and similar problems.
A proper inventory management system will help you keep an eye on stocks and what stage they are in. When something goes missing, then you’ll be able to more quickly track who’s in charge of the missing stock.
Not only does this safeguard you against lost profits and mishandled stocks, but it also helps streamline the movement of your entire inventory. Since everyone knows where certain stocks should be, employees and others are less likely to handle stocks without care – for fear of losing it.
Although inevitable, seeing missing stocks as early as possible will help you put a stop to it.
Improve your bookkeeping by automating the process of logging sales and operational costs. This way, you won’t have to go over everything manually – avoiding any margin of human error.
After all, it is easy to make a mistake when you are dealing with such a high volume of stock in your warehouse.
Inventory management makes the entire process go by faster so you don’t have to keep an eye on your sales and expenses 24/7. In most cases, you are able to immediately see how much you have made, lost, or spent after an entire day when you check your inventory tracker.
Measuring Supply and Demand
There is nothing more heartbreaking than stocking up on something that you think will sell incredibly well – only to flop days later.
While it may be nearly impossible to pinpoint exactly which products your customers will eat right up, it is possible to minimize the risks associated with it. Gathering inventory movement data over a certain period of time tells you more about your audience than any other metric.
This way, you can stock up on items that sell more quickly, and slowly wean off items that sit in stock longer than they should.
After all, the ultimate goal is to make sure your sales skyrocket. And the best way to do that is by meeting your customers’ needs. In this case, it is finding out what they want, and making sure you have enough of it in stock to meet demand for trending products.
It is important to understand that both overstocking and understocking won’t do you any good.
Overstocking, for example, can result in lower working capital, and even cause you to bleed profit through scalable warehousing costs and depreciation.
Meanwhile, understocking could negatively impact your business when your customers are disappointed that they’ve missed out. One of two things can transpire when this happens:
1. Either they go to a different seller and buy the item there. Ergo, your business is also missing out on earning a new customer with the potential of earning their loyalty.
2. Or, they wait patiently for your next restock.
Since the former is a far more likely scenario, you don’t want to take your chances – at least Amazon isn’t. The e-commerce titan is so focused on avoiding understocking that they’ve spent considerable resources across the last six years to create predictive AI, capable of foreseeing future customer demand.
All of this is done to avoid negative customer experiences and circumvent the rising cost of order fulfillment. After all, you only make a first impression once – and no one wants to bet on a losing horse.
Keeping Up with Demand
Just because you are currently operating a small business doesn’t mean you have to be forever. Whatever industry you are in, competition is fierce. Not only will you be going head-to-head against large enterprises, but you may also need to partner with a business larger than yours.
Furthermore, you may also dream of transitioning from a small business to a full-blown operation. Whatever the reason, an inventory management system will always be a necessity.
How The Lack of Inventory Management Negatively Impacts Your Business
Ask any successful business owner, and they’ll tell you that managing their inventory can be stressful. We understand that this may be one of the biggest hurdles you are trying to conquer right now. And while it may seem like you are saving a lot of money by keeping track of your inventory manually, it could actually be hurting your sales instead.
There are two main problems that arise with poor inventory management:
Problem #1 – Too Little Inventory
When you aren’t able to keep track of your inventory real-time, it is easy to miss exactly how well a specific product is doing. Because of this, you may be unable to keep up with your par levels. When this happens, and you aren’t able to restock quickly enough you may miss out on a potential sale.
In some cases, you may even be unable to make sure you have enough stocks when peak season comes in. This is extremely dangerous for small businesses since it can lead to two even greater problems:
When you miss out on making a conversion because you don’t have enough stocks, then you are losing money. Not only that, you are also helping drive your views to your competitors. When customers visit your website to purchase something specific and it is not there, it is highly likely that they’ll look for other businesses who have it in stock.
When visitors opt to shop at competitor channels instead of yours, you are losing out on the opportunity to gain a customer. Beyond not earning money from the sale, you are also essentially giving them no reason to shop with you again. Instead, they may become frequent buyers at a competing website.
Problem #2 – Too Much Inventory
While you don’t want to be caught without any stocks on hand, you also don’t want to keep too much on your shelves. This not only has the potential of slowing down your ROI, but it could also lead you to lose money.
Not all products will perform well. Some will sell out in a month or two – if you are lucky. While others may eat up valuable space for several months – even years. This not only limits the space you have for stocking up on more sellable products, but it might also be costing you more money in the long run.
When inventory sits untouched for extended periods, it takes on part of your storage and warehousing charges. Not only is it inconvenient, but it also means you’ll stay out of pocket longer.
Managing your inventory is a must for any growing business. While you may not think you need it now, you will eventually have to update, install, and automate your processes to make sure your business works efficiently at higher scales.
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