Guide to Small Business Inventory Management

When you run a small business, there are many important factors that you need to consider on a daily basis. Employee scheduling, the cleanliness of your store, sales, expenses and so much more.

Tracking inventory needs to be one of your priorities. If you don’t have enough product on your shelves or in your storage room for a popular item, you can lose customers. A German study showed 63 percent of potential customers who were unable to find what they wanted in one store didn’t bother to order it in that store for later delivery, but would instead buy the product from another store or not buy it all.

On the other hand, if you have too much product on your shelves or in your warehouse that isn’t selling it can also cost you money. Inventory management is a delicate balance for the small business owner.

Fortunately, today there are many good inventory management software tools available for the small business owner which, when combined with a good point-of-sale (POS) system, can help make the difference between success and failure.

Regardless of whether or not you use inventory management software, there are some best practices that you should follow in either situation. These tips will help to ensure that you have a solid understanding of your company’s inventory management.

Think About Using FIFO

FIFO stands for “first in, first out.” In FIFO, the oldest cost of an item will be the one that is removed from your inventory when one of those items is purchased. Think of it like this — if you run a meat or fish market, the meat or fish you want to sell first are the ones that you brought into your store on Monday, not on Tuesday. Or if you carry a line of specialty jams in your deli, sell the ones that you stocked in May and not the ones that you added in June. You’re selling your goods in the order that you created or purchased them.


This is especially important if you deal in perishable items, but it also works for nonperishable goods. If you leave an item sitting around for too long, it can be damaged or become unsellable.

Whether you’re using FIFO in your store or in your warehouse, you’ll want to put new items in the back and have the older products in the front. FIFO helps insure that you don’t have old inventory lying around for too long.

Try the ABC Method

Every business has bestselling items. Businesses need to have tight inventory control over these items, and one way they do that is by using the ABC system, also known as Control by Importance and Exception. This method categorizes all of your inventory based on which items sell best.

  • A: These are your bestsellers. They typically account for only 10 to 20 percent of your inventory but bring in 70 to 80 percent of your annual sales.
  • B: These items make up 30 percent of your inventory and 15 to 25 percent of your annual sales.
  • C: Half of your inventory is likely made up of category C items, but they only account for five percent of your annual sales.

Products classified as A are the best-selling items and they make up the smallest percentage of your inventory. However, you need to keep track of these items closely because they are your biggest sellers. The C category contains the items that don’t sell as well, so you can use a simpler inventory management method here.

The idea behind ABC is that you aim to maintain the tightest inventory controls over your top-selling items in Category A. It’s essential that you always have these products in stock.

Audit Your Stock Regularly

Even if you have the best inventory management software in the world, you still need to do an actual count of your inventory to ensure that you have the stock on hand that you think you do.

You can choose from any one of several ways to audit stock. Some experts suggest doing it monthly or at the very least quarterly. Remember inventory can be stolen, damaged or accidentally thrown away. Checking your inventory through regular audits is an important step in maintaining accurate inventory counts. Depending upon the size of your business, you might also want to do a large annual audit to make sure that you count everything in your store and in your warehouse.

Another idea is to do regular daily audits or more frequent spot checks on high-value items. High-value items can attract the attention of shoplifters or light-fingered employees. This kind of inventory “shrinkage” costs retailers a lot of money. According to the National Retail Security Survey in 2015, shoplifting accounted for 38 percent of shrinkage with employee theft a close second at 34.5 percent.

Conduct Quality Control Checks

If you own a bike shop, for instance, you want to ensure that the products you sell are in good working order and not damaged. It is recommended that you have your employees conduct at least one quality control check per quarter.


In this case, your employees are counting stock levels, but with a particular focus on testing that your products are in good working order. As they are taking inventory of the stock, it gives them a chance to check for damage that may have occurred during shipping or storing, and to make sure each item is properly labeled and has a correct SKU number.

Hire a Stock Controller

Making sure you have the right amount of stock in your inventory is so critical to your business that it’s probably a good idea to have one person who handles all purchase orders, receives product deliveries and is constantly checking to ensure that you are getting exactly what your ordered.

Having a stock controller greatly reduces the likelihood of overstocking inventory. A stock controller can also make sure that you’re purchasing more items that sell, and less items that don’t. This is true whether you’re dealing with raw materials or with finished merchandise.

Consider Drop Shipping

Drop shipping offers three tangible benefits — (1) you can try a new product line without committing to it, (2) you don’t have to worry about inventory controls, and (3) you don’t have to pay shipping costs.

With drop shipping, you act as an intermediary. You may own a well-known store or business and the manufacturer of a particular good is interested in having you sell some of their merchandise. The customer orders the good at your store or via your online site, then the order goes to the manufacturer who ships it to the customer directly.

Although the costs involved in drop shipping are relatively high — after all, most of the profit goes to the manufacturer — it is still possible to make a profit because you are not investing any capital in storage space or shipping.

Never Make Inventory Decisions on Gut Feelings

Almost all decisions based on “gut feelings” are bad ones. Rarely does a gut feeling turn out right, and even then, it’s probably more of a coincidence than anything else. Following a gut feeling is only asking for trouble.


When you are deciding what items you should stock, use your inventory management software to help you make those decisions. Good inventory management software will tell you a lot about which items are selling the most, how products are doing seasonally, and when it’s the right time to order more inventory.

Inventory management software is vital to accurately forecasting potential sales. Along with the data gleaned from your software, you want to pay attention to information such as market trends, the health of the economy, tariffs that may impact your business, and the relative success of marketing approaches worked.

Let Go of Spreadsheets

Spreadsheets were a great idea, but in the 21st century, when so much good inventory management software is available, spreadsheets are like typewriters — fun to show the kids but not as efficient as computers!

The main reason that spreadsheets are not an effective inventory management option is that you need to update them manually. And that means taking time away from managing other parts of your business. Even if you have a stock controller looking after all your inventory management needs, the daily requirements of managing spreadsheets can be onerous.

Spreadsheets also don’t scale with your company. They don’t give you the immediate feedback on when you need to restock or connect with a good POS system. Business moves too fast for spreadsheets to be effective any longer.

Get Good Inventory Management Software

Business moves very fast in the 21st century. The right inventory management software can help keep you on the cutting edge. Here are some of the advantages of good software:

  • Inventory management software allows you to keep an eye on your inventory in real time.
  • It allows you to forecast demand for an item more effectively.
  • Inventory management software helps you keep more top-selling products in stock, and less inventory of the products that don’t sell as well.
  • It lets you see when items have stopped selling during the past year, which makes it easier to remove them from inventory.
  • Inventory management services often come with a web portal or mobile app that allow you to see your inventory levels in real time on any device, no matter where you are the world.

Best of all, your inventory management system can be directly accessed from your Point of Sale system. In fact, most POS systems offered today must include the option of connecting to inventory management software. This is based on demand from retailers who know the value of integrated POS and inventory management systems. When a sale is made and recorded on the POS system, it also immediately goes into the inventory management system so you know in real-time how much inventory you have in stock.

National Retail Solutions (NRS) Offers a POS System With Inventory Management Software


When you’re looking for an industry leader who can give you a state-of-the-art POS system integrated with important data and analytical tools to help you run your business – including a great inventory management system – look no further than our Ultimate Point-of-Sale Bundle.

The Bundle gives you everything you need to give your customers a modern and quick checkout experience, and to ensure your business is operating at peak efficiency. Our inventory sales management tool allows you to manage your stock levels and receive alerts when items begin to run low.

Along with these essential point-of-sale features, our software also includes important business features like store analytics, employee management, pricebook management, and loyalty software.

If you are interested in learning more about our Ultimate Point-of-Sale System, you can call us at 1-833-289-2767 or contact us online.