Why Is Inventory Management Important for Small Businesses?

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small business inventory management

If you want your small business to succeed, you should pay close attention to how you’re managing your inventory. We’re going to explain what inventory management is, what it looks like for different types of small businesses, why it’s important, and how you can do it effectively. Strategic inventory management that uses the right tools, especially a POS system with inventory management software, can help you run your company more efficiently and will keep your customers coming back for more. Focusing on improving your inventory management is one of the best ways to grow your business.

What Is Inventory Management?

Inventory consists of the products you plan to sell. If you own a small manufacturing business — which includes businesses like bakeries or boutiques where you sell handmade goods — then your inventory also includes the ingredients or tools you use to create your end products. For example, in a bakery, inventory would include the baked goods currently on sale as well as your flour, eggs, sugar and more. Inventory is more straightforward for most retail stores. It’s the stock you have in your backroom and on your shelves.

Inventory doesn’t manage itself. That’s why inventory management is a critical ongoing task for many businesses. On the most basic level, managing your inventory means you keep track of what inventory you have in stock and know when you need to order more stock. Effective inventory management also involves paying attention to key performance indicators that let you know how various products are selling so you can make informed decisions about which products to carry in the future.

What Does This Look Like for Various Small Businesses?

Inventory management looks a bit different from business to business depending on the types of products you sell and whether you use consumables at your business that you also need to manage. Let’s look at some examples of what inventory management looks like for just a few of the types of small businesses we work with:

  • Convenience stores: C-store customers want a place where they can quickly pick up the items they need without having to navigate a big-box store. Managing convenience store inventory involves closely monitoring which products are selling well and which aren’t. Each spot on your shelf is valuable, so you only want to carry items you know your customers are looking for, and you want to keep them in stock.
  • Boutiques: Boutiques often carry carefully curated, unique items and may not keep a consistent list of items in their inventory, so managing this inventory is different from managing inventory at another store. If you own a boutique, you want to stay on top of trends and make sure you don’t overstock an item that you may end up having to clearance to get rid of.
inventory for small store
  • Liquor and tobacco stores: Liquor stores and tobacco stores carry a specialized set of merchandise, but there is still plenty of opportunity to refine your product offerings. If you notice a certain type of cigarette or a particular brand of whiskey isn’t selling well, you could replace these items and the shelf space they take up with products that will sell.
  • Grocery stores: Supermarkets or grocery stores typically have a long list of SKUs they carry, which includes a lot of perishable products. When the products you carry have a short shelf-life, you can’t take a chance on throwing unsold inventory away. You also don’t want to disappoint customers who stop in looking for a specific ingredient for a recipe they’re eager to make.
  • Beauty salons: Retail stores aren’t the only types of businesses that need to manage their inventory. If you own a beauty salon, you likely have some hair, skin or nail products available for sale at your salon. No matter how much of your business is focused on selling products, any amount of inventory needs to be managed properly if you want this aspect of your business to run smoothly.

Why Should Small Businesses Care About Inventory Management?

Too many small businesses either have no method in place to manage their inventory or rely on poor, limited methods. This is a problem because inventory management can be a critical factor in shaping the success of your company. Before we talk about what could happen if you don’t manage your inventory, let’s focus on the positive results you can expect when you implement strategic methods of inventory management.

Managing your inventory properly leads to some great results. It will help you:

  • Be informed: No more need to operate off of guesswork or hunches. When you stay on top of managing your inventory, you know exactly how much stock you have on hand and when you need to order more. Being informed means you can more accurately predict the future and can make data-driven decisions.
  • Save money: When you can accurately pinpoint what will sell and eliminate unpopular SKUs from your product lineup, you can save your business money. Especially if you sell perishable items that could end up getting thrown out, you can save your company money by only making what you expect to sell or just a bit more. Eliminating waste and maximizing the products that do well is a recipe for financial success.
  • Save space: When you manage stock efficiently, it doesn’t just mean financial savings but space savings, as well. Small businesses are often limited to small backrooms to store stock, so using this space well and not overcrowding it unnecessarily is important. Only store what you need and enjoy the orderly storage space.
  • Please customers: When customers find the products they love at your company and know they’ll always be in stock, they’ll be satisfied with their experience. Whether that specific brand of Prosecco they love is waiting for them on the shelf at their local liquor store or their preferred brand of pet food is consistently available at their local convenience store, customers will appreciate that they can count on your business.
good inventory management

What Can Happen If You Don’t Manage Your Inventory?

We’ve seen the positive results you can enjoy when you manage your inventory effectively, but you may still be wondering how bad it could be to run your company without an emphasis on inventory management. Here are some issues that are common to businesses that don’t properly manage their inventory:

  • Financial waste: When you don’t manage your inventory, you are bound to make poor purchasing decisions that lead to either having too much or too little of certain products. When you have too much of a perishable product that doesn’t sell, you essentially toss your money straight into the garbage can. For non-perishable products, you’ll likely place them on clearance and take a loss just to get rid of them.
  • Missed sales: The other scenario is that you don’t purchase enough of a particular product due to poor inventory management techniques. When you have a stock-out, you miss out on potential sales. Many stock-outs occur due to faulty ordering and replenishing practices in-store. Missed sales mean missed profit. They could also lead to unhappy customers, which we’ll discuss more in a bit.
  • Cash flow problems: Waste isn’t the only financial consequence of not managing your inventory. You can also expect to deal with cash flow problems. Any inventory on your shelves represents money you’ve spent without any profit from it yet. A common mistake is to buy too much stock, which results in too much of your money being tied up in inventory rather than being available for other meaningful uses.
  • Chaotic stockrooms: Mismanaged stock is unlikely to look orderly or to fit neatly in your stockroom. When you’re purchasing inventory and stocking shelves without much strategy behind it, you’ll likely have a crowded, chaotic stockroom. A stockroom like this can lead to injuries for you or your employees and can make it difficult to pull stock or even know what you have in the back.
  • Unhappy customers: Another inevitable results of not managing your inventory is upsetting your customers. When a customer finds a product they love at your store, and it’s temporarily out of stock the next week, this could be their last trip to your store. Even when you keep items in stock but don’t pay attention to what sells and what doesn’t, you could still have customers who are dissatisfied with your selection.
manage inventory

How Can You Manage Your Inventory Manually?

Some companies still rely on manual inventory management tools. Typically, this means they maintain a spreadsheet on the computer. The spreadsheet should have columns dedicated to fields like the name of a product, the SKU and the quantity you currently have in stock. You should ideally adjust this number each time a product is sold or comes in. However, that’s an unrealistic goal for most, so what ends up happening is that the numbers on your spreadsheet are outdated most of the time.

It isn’t just that information quickly becomes outdated. This manual method also allows plenty of room for human error. One study revealed that retailers only had a 63% accuracy rate when it came to inventory tracking. To make sure the information on your spreadsheet doesn’t get too far off the mark, you need to implement periodic checkpoints.

Manual methods of inventory tracking should always include manually counting your inventory periodically so you can update your numbers and minimize discrepancies between the numbers you’ve recorded and the reality of what you have in stock. Audit your stock monthly or, at the very least, quarterly. These periodic checks are a good idea no matter what methods you use to track inventory.

Remember that inventory management goes beyond just recording numbers. It’s about making decisions. If you’re managing inventory manually, you’ll want to implement a strategy like ABC analysis to help you make decisions about which products to reorder when. This technique involves categorizing your inventory into three classes. Popular products that generate around 80% of your revenue belong in Class A. Class B is for inventory that is marginally popular and accounts for 15% of revenue. Class C is for inventory that moves more slowly and only accounts for 5% of revenue.

To successfully implement a strategy like ABC analysis, you need to gather and analyze a lot of data. Consistently maintaining information on a spreadsheet and coming up with figures to know how products are selling will take up a lot of time. That’s time you won’t get to spend on other business tasks. So, while manual inventory management can be done, you’ll have to dedicate a significant number of work hours to it.

How Can You Use Technology to Manage Your Inventory?

Any type of inventory management is better than nothing, but manual inventory tracking isn’t typically the best option, as we’ve seen. It requires a great deal of time and effort and is still limited. If you want to manage your inventory more effectively and with less effort, then you need to take advantage of modern technology.

pos with inventory management

There are many inventory management system options on the market today, but the best option for most small businesses is to integrate their inventory management with their point-of-sale (POS) system. If you’re unfamiliar with a modern POS system, you can think of it as a high-tech cash register that keeps track of inventory and does everything else to facilitate the checkout process. When your POS comes with inventory management tools, you don’t have to monitor inventory separately. Instead, when a cashier rings up an item, your system automatically subtracts one from the quantity you have in stock. It’s that simple.

When it comes to making restocking decisions, there’s no easier or more reliable method than using inventory management software for small businesses. A POS system with inventory management like the POS+ from National Retail Solutions will tell you at a glance whether a product is well-stocked, needs to be reordered soon or needs to be reordered immediately. Following these guidelines will help you keep items in stock consistently rather than reordering when you suddenly realize you’re out of something.

When you have software to track your sales, it doesn’t only help tell you how much you have in stock — it can also help you make strategic decisions about which products you should continue carrying and which you should potentially eliminate from your product offerings. You likely have a general sense of which products do well and which don’t, but you don’t have to rely on these general impressions when you have a POS inventory system for your small business. This system will deliver analytics that let you know exactly how each of your products is performing.

Manage Inventory Like a Pro With the POS+ From NRS

Inventory management is a critical aspect of your business. As we’ve seen, using the right technological tools to manage your inventory requires less time and effort, helps you keep items in stock and delivers the data you need to make strategic decisions. All of this leads to a thriving small business that carries the right items in the right quantities and keeps customers happy.

With the technological tools that are available today, there’s no reason to struggle with outmoded systems like spreadsheets. Inventory management software may cost more upfront, but consider all the money you’ll save by eliminating waste, saving time, never missing a potential sale and more. The best way to manage inventory is to use software that integrates seamlessly with your POS system.

The POS+ from NRS is an all-in-one system that features quality hardware and cutting-edge software, giving you everything you need to facilitate the checkout experience and to manage your inventory behind-the-scenes. The POS+ will also streamline other aspects of your business, including your customer loyalty program, so you can spend less time struggling with manual methods and more time watching your business thrive. To learn more about how NRS can help your business succeed, contact our sales team today for a free quote.


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