How to Organize Inventory for Small Businesses in 8 Steps

Inventory management is the process of having the right products, in the right quantities, at the right time to sell to customers. Accurately managing inventory can increase revenue by preventing stockouts, excess inventory, and unsold products.

While it can be done manually, the easiest solution is to use a software program to automate the process. Our recommended inventory management solution for most retailers is Lightspeed.

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If you’d rather manage inventory manually, download our free inventory management workbook.

We detail the eight steps to proper inventory management below. If you want to automate, learn more about our top picks for small businesses with our guide to the leading inventory management software, or head down to the bottom of this article and take a quiz that will match you with the best solution for your needs.

Step 1: Organize Product & Vendor Information

The first step in organizing your inventory is to set up your stock and supplier information in a reliable and accessible system. Some businesses use manual tracking methods such as spreadsheets. However, the best option for retailers is to use a point-of-sale (POS) system that will keep a vendor directory and searchable product pages for you.

To organize your products, you’ll first need to record information about each item and file it on a product page. Product-specific information should include:

• Product name
• Quantity
• Your internal product stock-keeping unit (SKU) number
• Manufacturer’s Universal Product Code (UPC)/European Article Number (EAN) or other unique identifiers
• Short description
• Product category, class, or family
• Wholesale cost
• Regular retail price/MSRP
• Your selling price
• Colors or sizes
• Vendor, supplier, or manufacturer name
• Reorder quantities
• Shipping details: size, weight, box pack, cost, dispatch time, etc.
• Picture or product image

Keep track of your product information so you can reference it over time and reorder easily. (Source: Lightspeed)

In addition to creating a log of your products and their information, you will need to file your vendors’ information into your system. That information should include:

• Vendor name
• Vendor contact name
• Vendor billing information
• Vendor phone
• Vendor email
• Vendor website
• Order volume
• Payment terms
• Line rep or showroom contact
• Fulfillment and shipping times
• Top products from vendor

Build Relationships With Product Suppliers

Step 2: Create & Submit Accurate Purchase Orders

A purchase order (PO) is a buyer-created record of an order that is submitted to a vendor that serves as a legal contract for the sale of goods. Typically you will use your POs to cross-reference actual goods and invoices received to those ordered and paid for. If there is a discrepancy between your PO and the goods received, you can use your PO to return to the vendor and settle up.

Purchase orders record what you ordered from your vendors and act as a receipt that you can compare to the goods you actually receive. (Source: Fit Small Business)

Keep track of your POs so you have a record of everything you purchased from your supplier and can cross-reference your deliveries with what you actually expected to receive. This will help you stay on top of your inventory counts and prevent shrinkage.

For example, say I want to order 300 pairs of shoes from my favorite supplier for this coming spring. I would fill out a purchase order form with the exact shoes and quantities that I want, see the total price, and submit my PO to the supplier with a delivery date. Then, in the spring, when my shoes get delivered, I can use my PO forms to make sure that my quantities, sizes, and models arrive accurately.

Purchase orders are typically submitted to vendors electronically through email or the vendor’s online ordering portal. If your vendor does not have an order form, you can use our guide to creating purchase orders to create your own. Alternatively, there are features within POS systems like Lightspeed that you can use to make your POs easier and more efficient.

Many POS systems have directory features to manage vendor contact information, and some even allow you to send POs directly from their interface. POS systems also have low-stock alerts that tell you when an inventory item reaches a designated minimum threshold and when you need to place a new PO. This will help you prevent stockouts and the accompanying disappointed customer.

Step 3: Receive Orders Accurately

Once you have submitted your purchase order for the right amount of stock, you want to be sure that you receive that stock accurately. Supplier errors happen fairly often, and if you aren’t being systematic about receiving your inventory, you might get shorted, overcount, or underestimate your inventory levels—which can lead to shrinkage and a decrease in your margins.

To receive inventory correctly, companies should:

1. Unpack the shipment and organize items by product.
2. Count/scan products.
3. Compare the count to your PO.
4. If the counts and products match, file as received.
5. If you find errors like wrong, shorted, or missing items, note these on your PO and contact your supplier immediately to resolve them.
6. Shelve or store all correctly received stock (tag or label first if needed for your system).
7. Enter your invoice into your accounting system.

Many inventory management systems have accompanying hardware or apps that allow you to scan products rather than count and log them manually.

Accurately counting and receiving stock is important for preventing shrinkage and ensuring the accuracy of your orders. (Source: Pinterest)

How to Accurately Receive Stock Shipments

1. Unpack the shipment and organize items by product.
2. Ensure that you receive all boxes, containers, or other units in the shipment based on your POs.
3. If the counts and products match, file as received physically or in your POS system.
4. If you find errors like wrong, shorted, or missing items, note these on your PO and contact your supplier immediately to resolve them.
5. Shelve or store all correctly received stock (tag or label first if needed for your system).
6. Enter your bill into your accounting system.

Step 4: Tag & Label Inventory

Once your products are physically on hand, you will need to tag and label your inventory so it is ready for the floor and organized internally. Your tags should include two main things:

1. Price: The selling price of your item. All your inventory will need this before it can go out on the floor and be customer-facing.
2. Product Labels: You should have some sort of labeling system for your inventory so that you can easily organize and track it internally. We recommend using both a barcode label—so you can easily scan items in your inventory system and at checkout—and a descriptive written label, like “red shirt” or “kids leggings,” that corresponds with where the item goes in your store and in storage.

Regardless of the type of labels you use, a good time to tag and label inventory is during the stock receipt process. That ensures the task isn’t overlooked and prevents the unlabeled stock from being shelved or displayed for sale.

Once printed, labels should be fixed directly to the product. Some inventory might even arrive prelabeled with the manufacturer’s barcodes, description, and price. If you aren’t using an internal labeling system, this makes your job easy. You can just start organizing.

Use our guide on how to create barcodes (plus a barcode generator) and check out our picks for the best barcode label printers to get started labeling your products.

Step 5: Organize Your Stockroom or Warehouse

With your stock counted and labeled, it’s time to organize it. Having an organized stockroom will not only make things easier to find but will allow you to fit more merchandise and keep better tabs on your inventory.

In retail stores, tall storage shelves or double-tier hanging racks can maximize your wall space while allowing movement and easy access. Additionally, storage bins can be stacked and labeled on the ground to use floor space efficiently.

In larger warehouse settings, there is typically more room to store goods within aisles that have built-in shelving and hanging storage. The biggest thing you will want to ensure is that you choose storage devices that make sense for your merchandise and can change over time.

For example, we had a small storage room at my boutique, so we used lots of hanging racks and stacked bins to maximize the little space we had. The racks were easy to roll, and we could label them any way we needed with rack tags. Similarly, the bins were great for our heavier/knitted items that took up too much hanging space or couldn’t be hung, and were easy to label, depending on the inventory we had on hand.

Whatever your method, your stored inventory needs to be well-organized, clearly labeled, and accessible for pulling and inventory counts. This can be done using the boxes goods come in, stacking bins, or even hanging separators for hung apparel.

Utilize your wall space to fit as much product as possible in limited space. (Source: Pinterest)

Step 6: Track Inventory in Real Time

Tracking your inventory levels in real time is key for keeping the right items on the shelves in the right quantities—i.e., good inventory management. Whether by hand or through your POS system, a sound inventory management system records every sale in detail and adjusts inventory levels as each item is sold.

While you can use a spreadsheet for real-time inventory tracking, we recommend a POS system to streamline this process dramatically. POS systems track real-time inventory levels and adjust your counts with every sale. As your inventory numbers dip below your safety stock level, you can set up reorder alerts, stockout warnings, and automatic PO generation. A POS system will make tracking inventory levels and reordering your supplies quick and easy and, most importantly, will base your inventory on actual sales trends, not on your best guess.

Step 7: Conduct Regular Inventory Counts

Physical inventory counts can be mundane and tedious. However, physical counts can reduce all types of inventory problems dramatically. Most small businesses do a full inventory count once each year for tax purposes, but it’s good to perform smaller partial inventory counts, or cycle counts, even if you are using a POS system.

Step 8: Reconcile Discrepancies

Ideally, your physical inventory counts will match your projected QOHs. However, that is not always the case. If you have more or less of a product than anticipated, you will need to investigate the problem and reconcile the difference. In retail, this difference is known as shrink.

There are two primary reasons for inventory shrinkage. Either there has been a clerical error or theft has occurred. Sometimes, clerical errors are not actual losses—an item could have been misplaced or a key mistyped. Other times, shrinkage indicates actual loss, and you should investigate where it happened so you can work on preventing it in the future.

If you determine that your missing merchandise is truly gone, you should adjust your QOH in your records. After that, you need to record the dollar value lost due to the shrink in your inventory.

Inventory Management System Quiz

Thinking you want to automate your inventory management and use software instead of a manual application? Answer a few simple questions below and get matched with the best inventory management system for your business and its needs.

Inventory Management Frequently Asked Questions (FAQs)

Click through the questions below to get answers to some of your most asked questions about inventory management.

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Bottom Line

A good inventory management system means that you always have an accurate picture of your stock so that you can avoid waste and provide the merchandise and experience that your customers expect. Whether you’re looking to learn the basics of how to organize inventory for small businesses or reinvigorate an existing system that has become disorganized, these steps will help you set up and streamline your operations.