A good inventory management system provides up to date info on what you have in stock, what’s en route, and what is selling fast. You’ll have all the information you need to spot theft, cut losing products and expand winners, and increase your small business’s profits.

This article details the seven steps for a successful inventory management system. We’ll also show you how to get your stockroom in order. Plus, we have a case study of a small business that went from disorder to perfect order.

If you’re ready to take your inventory management to the next level, we have what you need.

Before we dive into the details on this topic, we also suggest you check out LightSpeed, our recommended POS software. Visit LightSpeed to learn more.

1. Organize Your Product and Vendor Information

If you don’t have your product and vendor information organized, ordering inventory becomes a nightmare.  This is why the first step to implementing a great inventory management system is getting all of your product and vendor information organized and in one place.

This includes:

Product Information:

• Product Name
• Description
• Picture
• Wholesale Price
• Retail Price
• SKU
• UPC
• Vendor
• Shipping Info

Vendor Information:

• Business Name
• Business Contact Info
• Billing Information
• Representative Name
• Representative Contact Info

Some small businesses will still be holding onto mountains of dog-eared vendor catalogs, notebooks filled with product SKUs, and rolodexes filled with their various reps’ information. You can make a system like this work, but it’s error prone, inefficient, and creates the kind of clutter that invades every other aspect of your business.

An improvement would be to move your product lists and vendor notes to a spreadsheet. Doing so will reduce the clutter and allow you to access the information even when you’re away from the office.

However, both of these methods of organizing product and vendor information are outdated and potentially leave your business at a disadvantage to any competitor using an integrated Point-of-Sale (POS) system.

New POS systems save all of the product and vendor information listed above. You can import that info from a catalog or spreadsheet or enter it manually.

Then you can ditch the catalogs. No more clutter, no more missing information. Every detail you could want about a product or a supplier is right at your fingertips (desktop, tablet, mobile) no matter where you happen to be.

Get two-week free trial of our recommended POS system, Lightspeed POS. Then follow our step-by-step-guide on how to manage your inventory using Lightspeed.

2. Create and Submit Accurate Purchase Orders

Creating and submitting an accurate purchase order (PO) to your vendors sounds easy, right?

But illegible penmanship, inaccurate SKUs, disorderly or confusing purchase order templates, and poorly scanned or faxed PO’s are commonplace and end up costing businesses time and money.

It’s a good idea to schedule a specific day and time to submit PO’s. This reduces the likelihood that you’re distracted with other tasks and letting errors creep in or forgetting to submit a PO altogether

If your vendor requires that you draw up your own PO’s and submit them via fax or email, here are some sample purchase order templates to help keep things clear.

Purchase Order Example 1  –  Purchase Order Example 2  –  Purchase Order Example 3

Type the PO if possible. If not, make sure you use a dark ink, write legibly, and make sure you can differentiate between letters and numbers that look similar, like 1’s, L’s, and I’s.

If your vendor has an online portal for you to submit PO’s then you will not have to worry about penmanship. As long as your inventory counts are accurate and you enter in the correct data you should be fine.

The way to really increase efficiencies and reduce errors the most is by incorporating a modern POS system.

A new POS system, like Lightspeed POS, automatically connects your current product lists, your vendor catalogs, and your rep’s info. You can generate and submit PO’s right from your POS.

But the real advantage is that the POS system is fully integrated into your current inventory levels, your customer transactions, and physical inventory counts. This integration allows you to actually automate PO generation.

If you sell a product, a good POS system will automatically update your inventory accordingly. If the inventory reaches below a level you’ve specified, you are alerted via text or email and a purchase order is drafted automatically.

You then review  the PO, which will have all of the vendor contact information as well as any special notes or rates. You can then approve the PO as is or make any additions or edits. It’ll even integrate with popular accounting software, like Quickbooks.

Not only that, but you can do all of this from a mobile device.

3. Receive Inventory with Speed and Accuracy

We spoke with Jason Richelson, a small business owner with seven years of retail experience in the grocery and wine business. Jason is also the former CEO of Shopkeep, the maker of a POS system we’ve previously reviewed.  

He emphasized to us the importance of having a system in place for receiving inventory. He said that this is where many small businesses make inventory management mistakes.  And data on inventory shrink back this assessment up. The National Retail Federation’s 2015 report on inventory shrink found that 28% of shrink could be assigned to vendor and admin error.

When you receive inventory from a supplier, there is a good possibility that there could be a difference between the PO you submitted and the actual inventory delivered. It is also possible that the products’ prices changed since your last order or that you were charged the wrong rate.

When receiving inventory, you need to:

1. Have the corresponding PO’s accessible. Either grab a copy or pull it up within your POS system so that you can catalogue all new inventory before it is put away in the stockroom.
2. Go over the invoice with the delivery person to confirm that the shipment is consistent with the PO you submitted.
3. Note any inconsistencies of inventory number or product price on the supplier’s copy of the invoice and your PO.
4. Make sure that whoever pays your invoices does not pay your supplier until you sort out the inconsistency.
5. Call the supplier within 24 hours to explain the inconsistency and correct the invoice. With Lightspeed POS the PO and your notes can be emailed to your rep directly from the POS.

With a system like this in place, you will know exactly how much inventory is coming into your store and prevent any overcharging for extra items, or items you didn’t receive.

4. Tag and Label Inventory

Tagging and labeling your inventory might seem like an obvious part of managing inventory, but it often gets overlooked.

Properly labeled inventory ensures products get stored in the correct spot and can therefore be found easily when they are needed. Accurately tagging your inventory will also ensure customers and cashiers are not confused about a product’s price.

This can be done by referring to your master inventory list and using a price tag gun. The problem with this method is the stickers can be damaged or altered. Also, sales require applying all new stickers.

Barcodes are the most reliable way to tag a products but will require a barcode scanner to read them. Almost all modern POS systems connect to the necessary hardware to use barcodes. Read our ultimate guide for more on making and printing your own barcode labels.

Your inventory may come with its own barcodes. If that’s the case, all labeling might consist of is adding a visible price tag that features your store’s logo. Then the product is ready to be sold.

However, if you’re selling your own or others’ craft products your inventory will likely not have barcodes. Luckily, most modern POS systems make printing your own unique barcode stickers easy. Lightspeed is no different. They recommend the Zebra Label Printer but other are compatible as well.

Tagging your inventory now will save you tons of time. During customer checkouts, customers and clerks are no longer guessing on price of the product.

TIP: Keep Your Units of Measurement Consistent

Jason mentioned that one one thing that often causes small businesses problems with their inventory is when the your units of measurement are inconsistent.

For example, wine store PO’s and invoices are often measured by the case. So, if you receive 30 cases of a specific wine in a shipment you would record those 30 cases into your notebook, spreadsheet, or POS system.

Several weeks later, when you’re doing a physical inventory count, if you count by bottle and not by case your inventory numbers will be off by significant amounts. In this example it would result in a significant undercounting of inventory.

Even advanced POS systems are susceptible to this kind of error. They’re only as smart as the data you enter.

Looking to finance the purchase of inventory? Kickfurther can help.

5. Record Your Sales

If you’re not recording your sales you’re going to have problems. Accounting and tax proble might be the first that come to mind. But you’ll also have trouble knowing what products left your store through a sales transaction and which were subject to a five-finger-discount.

You want to record what product was sold, what the product’s listed price is, and what price was actually paid for the product. You also want to record whether a discount was applied to the transaction. Ideally, you are able to total these figures per shift, per day, per week, per month, per quarter, per year. This data, combined with information from you purchase orders and physical inventory counts, are the cornerstones of inventory management.

The eye-straining, time-consuming way to do this is to pour over copies of your receipts and record that data in your notebook or spreadsheet. This method is error prone and tedious. Anything that is vulnerable to mistakes that still requires a ton of effort is always the first thing people ignore on their to-do lists.

But this task is automated with a modern POS system. Since a modern POS enables you to label every product with barcodes and scan them at checkout, you all but eliminate the problem of cashiers misidentifying products during a sale. They even offer tools to reduce an employee’s ability to negatively alter sales intentionally which we discuss in our article about employee theft.

In addition, a POS system like Lightspeed‘s fully integrates your sales data with your inventory counts. Combined with regular physical inventory counts, your POS will provide you with in depth, accurate inventory insights instantly.

You can use those insights to set automatic re-orders on popular products or use the sales reporting to estimate how much inventory should be included in your next order. While not foolproof, this feature has the potential to make inventory ordering much quicker and more cost-effective.

Zondra Wilson, President of Blu Skin Care, knows all too well how precarious fulfilling orders can be without an inventory management system that automatically updates inventory counts based on sales data.

Early on in her business, she was trying to keep inventory counts on a spreadsheet. But errors would inevitably creep in. “I have accepted orders without having the product on hand but thinking I had plenty based on my spreadsheet. Luckily, I was able to restock and fill those orders. But what if I hadn’t been able to? It would have been a disaster.”

Now, Zondra uses a modern POS system to help her with inventory management. “It keeps up with how many units I sell and alerts me when I’m running low. This gives me peace of mind. I never have to worry about selling product that I don’t have in stock.”

6. Physical Inventory Counts Made Easy

At this point you know how much inventory you ordered and received. You also know how much you’ve sold. The last data you need is how much inventory is left on the shelves and in the stockroom. Ideally, your numbers will look like this:

Physical Count = Received Inventory – Sold Inventory

Now it’s time to put your small business’s inventory management system to the test.

If you’re not using a modern POS system, you’re going to need someone to walk around the store and stockroom with a clipboard, paper and pencil. They will need to count all the inventory on hand, keeping in mind what unit measurements apply to a given product.

You’ll want to take that count and add the numbers to a separate reconciliation list. The reconciliation list will include the three data points listed above (physical count, received inventory, and sold inventory) for each product.

Once you upgrade to a new POS system, you can say goodbye to wandering around your store and stockroom with a clipboard and pencil. With a barcode scanner, tablet, or mobile phone, your physical counts can be integrated with the rest of your POS data in realtime.

While the POS system will help make physical counts much quicker, it’s still a chore that’s easy to procrastinate on. In fact, some small business owners let these counts go for so long that they never actually do it. That’s a mistake that will cost you.

Here are some tips from Jason to make physical inventory counts more manageable:

1. Break inventory counts into manageable chunks – Pick 10-15 SKU’s/products a day and just do inventory on those.
2. Inventory your stockroom then your shelves – Count your products in the back first, and then check your retail shelves when things are not busy.
3. Make sure all your products are accounted for – Compare your total count to what your POS says should exist based on sales data.

Using this system, Jason was able to do inventory everyday without spending hours. After a few weeks he would have inventoried his whole store. This is known as cycle counting.

There are other ways to do inventory as well. If you prefer knocking it out and doing inventory all at once, there is a great blog post called “Why and How to Do a Physical Inventory on a Shoestring Budget,” that gives a great in-depth how-to.

The important thing is to find a system that works best for your business and then stick to it. Using a new POS system like Lightspeed POS will make this chore much more palatable.

7. Reconcile Differences

Ideally, your sales data and physical inventory count have no discrepancies. If there are, then you will need to reconcile those differences.

The inventory that can not be accounted for is your inventory shrink. It is inventory that has either been stolen, lost, or gone bad/been damaged. Take note of these losses. They will be important not only for accounting purposes but also for addressing retail theft and employee theft.  

After noting the differences you need to reconcile them. You’re basically resetting the inventory count to what you now have based on the physical count. This is the number that will inform your next round of purchase orders.

If you’re working from a notebook or spreadsheet, you’re going to need to do some pretty simple arithmetic.This isn’t the hard part. The hard part was steps 1-6.

Lightspeed POS makes reconciliation very easy and all adjustments will impact any automatic reorder levels you have set up. Not only that, but with their accounting software integration, the shrinkage can be recorded and ready for your accountant or bookkeeper.

Setting Up Your Stockroom and Labeling Your Products

As you probably notices, the seven steps to inventory management are really about how to organize and track inventory information as accurately and efficiently as possible. Now it’s time to talk about how you physically manage your inventory. This starts with your stockroom.

If you don’t have a stockroom you’re going to have to buy in smaller quantities. Ordering less will end up increasing your cost-per-product with your supplier. But not having a stockroom will also mean a more cluttered, unprofessional storefront – and that will cost you sales. So even a small stockroom is better than nothing.

If you don’t have access to more space right now, learn how to make your cash wrap (checkout counter) optimized for all checkouts, deliveries, and inventory check.  

Just having a stockroom however is not enough. If your stockroom is not organized correctly, things will get out of hand quickly.  It will become difficult to know how much inventory you have and where it’s located. When it’s time to restock the shelves, you’ll be lost.

In order to have a successful stockroom you must:

• Plan your stockroom layout
• Determine the right shelving for your products
• Develop a consistent system for labeling and organizing your products

Planning Your Stockroom Layout in 3 Easy Steps

We’re all familiar with the saying “measure twice, cut once.” This is 100% applicable to planning your stockroom. A preliminary sketch of your stockroom doesn’t take long and can save you lots of extra time and work later. If you don’t draw up a plan for your stockroom, you’ll end up running into problems later, like shelves that don’t fit or popular products that need restocked often being placed in difficult to reach places.

1. Sketch out your room dimensions on a piece of paper. It seems obvious, but you have to make sure your shelving, inventory, etc fits into your space. Plus it can’t block doors and must leave room to receive deliveries.
2. Grab your complete inventory list. With a complete inventory list handy, there is much less of a chance that you will forget to include space for certain products. A good POS system, like Lightspeed’s, will allow you to pull this data up on a tablet instantly.  
3. Determine where your products will go.  Every product needs a designated place. Group similar items together and make sure that popular items are up front and easily accessible. You would obviously get more detailed than this, but here is a rough example:

Now that you have your stockroom layout designed, the next step is outfitting the space with the appropriate shelving.

For details on planning your retail store layout, check out our Complete Guide here.

How to Choose the Right Shelving for Your Stockroom

There are three basic principles for selecting shelving that is right for you:

• It needs to fit your space. Refer to your stockroom layout sketch. Width, depth, height – double check now to avoid time delays and the hassle of returns.
• It should be adjustable. Your stockroom layout is perfect for the moment. But as you add or subtract products, that may change. You want a certain amount of flexibility from your shelving to accommodate future needs.
• It should highlight, not hide. Your shelving should allow you to arrange and store your inventory in an organized and clear way. Employees should not need GPS or divining rod to locate the products they’re looking for.

Where to Buy Stockroom Shelves

Stockroom shelving can be purchased in person at a local hardware store or a major retailer like Home Depot or Lowes.

However, since you have such detailed specs from your layout, you will also have success ordering online from a retailer like Amazon. Ordering online will save you time and allow you to compare more styles, brands, and prices.

Here are a few of our favorite stockroom shelving options:

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Fit Tip: Purchasing from a major retailer and using their store credit card can help build or improve your business credit score. A better business credit score makes getting a business loan or favorable terms from suppliers more likely.

Labeling and Organizing Inventory in Your Stockroom

Once you have your shelves, it’s time to start organizing your products on those shelves.  If you don’t have a consistent system items will get misplaced and confused for other items.

Here’s how to set it up.

Unique Product Descriptions

Giving each product a unique description will make it much more likely that your shelves are stocked properly and your inventory numbers updated correctly.

The best way to do this is to start with the noun that best describes your object and then add qualifying adjectives. Let’s say you want to inventory a coffee cup.

It would look something like this:

Cup, coffee, tall, blue

If you do it the other way around with your adjectives first, you have to remember which adjective you put first in order to find it on your inventory list, which gets confusing.

It could be Tall, blue, coffee, cup or coffee, cup, tall, blue, etc…

There is an article called “How to Describe Your Inventory Items” that explains this process in more detail.

Distinct Item Numbers

As we discussed in the POS section, many items come with barcodes that can be scanned into your system.  For items that do not have barcodes already, if possible, you want to print and attach barcode labels to those products as well. It makes it less likely that something will be recorded wrong and also automatically updates your inventory count during checkout.

If you don’t have a modern POS system, here are several good tips for creating item numbers:

1. Avoid using letters that can be confused with numbers, such as O, I, and L.
2. Make your number long enough to be distinct, but not so long as to get confusing. Around 4-8 characters is a good choice.
3. Use some letters to add clarity – A good thought is to use several letters at the beginning of your product number that reflect your product description. For example: If my product description is sauce, red, meat, my number could be SAU101 or something similar.

Inventory Management Case Study

Prior to founding her first business, FutureDerm, Nicki Zevola Benvenuti, had balanced working part time jobs while in med school. She just hadn’t been exposed to the logistical side of a successful business. “I had no idea what operations should look like and when it came to inventory management, I was lost.”

Nicki wasn’t lost when it came to skin care and beauty products. She wanted to make a huge impact on the marketplace by selling scientifically-backed products. She ordered thousands of units a products for FutureDerm. “We literally had boxes of inventory everywhere and were shipping customer orders from multiple locations.”

“The first time I realized I had a huge inventory management problem was when we needed a balance sheet that had accurate inventory counts for investors,” she said. “It was a task that took days to complete. That made me really stop and think.”

Detailed balance sheets and inventory lists aren’t just required by investors. Your accountant or insurance agent has probably asked you for the same thing. And if you’re thinking of applying for an SBA loan, this is information that you’ll need, too.

To address the problem, Nicki hired someone to focus on inventory management. They organized the inventory by type, stored it all in one location, and started shipping from only that one location. They also started using WooCommerce and QuickBooks Online to help manage their inventory. “Since I put this new system in place, I’m free to concentrate on what I’m best at: content creation for my website, managing my team, and finding potential partners.”

Summary:

Follow the steps above and your store will be well on your way to running an efficient and effective inventory management system. Whether you’re looking to reinvigorate an old system that has slowly become obsolete or starting a system from scratch, this information will not lead you astray.

For those of you ready to upgrade your inventory management systems, be sure to read our step-by-step guide to managing inventory using Lightspeed POS.

Want to cut checkout time, better manage inventory, and streamline your purchase ordering?

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Want to Reduce Retail Theft and Better Manage Your Inventory? Click Here to find out how.