Unfortunately, businesses lose about 11% of their annual revenue due to poor inventory management, leading to stockouts and overstocking. Not to mention, around 43% of small businesses still use manual or no tracking systems, which, in and of itself, is inefficient, as optimized systems can improve order fulfillment by about 30%. That’s why inventory management for a small business is incredibly important.
If you can create effective inventory management, you’ll know exactly what stock you have, where it is, and when you need to buy more. Inventory management goes further, though. It’s the entire process of tracking your stock from the moment you purchase it from the supplier to the time it ends up in consumers’ hands.
Your goal should be to have enough product to meet your consumer demand without locking up your money in items that simply sit on shelves. If you can master inventory management, you’ll be a step closer to running a successful small business in Canada, improving cash flow, reducing waste, and increasing customer satisfaction.
So, with this in mind, let’s have a look at what our team at Bizfund has to say in this beginner’s guide about inventory tracking and stock management tips for better inventory management.
The True Cost of Poor Inventory Management
It’s a multifaceted issue, the true cost of poor inventory management. It can lead to considerable financial and operational consequences, including dissatisfied customers, lost brand trust, and competitive disadvantage.
Below are a few of the ways poor inventory management can affect your small business:
- Lost sales: When your stock levels are inaccurate, you miss sales. This leads to lost revenue opportunities.
- Emergency replenishment costs: Unfortunately, rush restocking and shipping can cost your small business 3 to 5 times as much as standard procurement.
- Overstocking: If you overstock, this excess inventory can tie up your cash flow. This can cause your business to incur additional unnecessary storage fees.
- Longer warehouse handling times: You lose money when teams spend more time, or excessive time, trying to find products or correct mistakes.
- Fulfillment flow disruption: You could experience delayed outbound deliveries, disrupting your fulfillment flow through inefficient pick-pack-ship processes.
Stock Management Tips to Reduce These Costs
To avoid the negative financial implications of poor inventory management, consider a few stock management tips. A few of the best include:
- Set reorder points: If you establish reorder points at minimum stock levels, you can reorder before products run out. This will help you prevent emergency shipping costs and lost sales.
- Track your inventory in real time: The worst thing you can do is fail to do so. If you use inventory software or POS systems, you can automatically update stock. This will usually help reduce errors and improve your cash flow forecasting.
- Review your slow-moving stock routinely: It’s important to identify products that aren’t selling. If you do this, you can adjust pricing, promotions, or purchasing to prevent overstocking and tied-up capital.
Five Inventory Management Methods
If you want to reduce costs, improve customer satisfaction, and optimize stock levels, you need to learn more about inventory management methods. Below, we’ve shared the key techniques to consider if you’re concerned about inventory management for your small business.
- ABC analysis: This method categorizes your inventory into three classes (A, B, and C). You’ll categorize goods into these categories based on their value and importance to your business. Usually, A is for high-value items, B for moderate-value items, and C for low-value items. With this method, you can prioritize inventory management based on the most important items.
- Just-in-time (JIT): The just-in-time method involves ordering and receiving stock only as needed in the production process. This helps you minimize holding costs. It also helps reduce storage costs and waste. However, you need incredibly accurate demand forecasting and reliable suppliers for this method to work.
- Last-in, First-out (LIFO): The last-in, first-out method is where you sell your most recently acquired items first. It’s often beneficial in times where prices are rising because it matches current costs against your revenue.
- First-in, First-out (FIFO): With the first-in, first-out method, you maintain fresh stock and have a more accurate reflection of inventory costs during inflation. This method assumes that you sell your oldest inventory items first and is best for those selling fresh produce.
- Perpetual inventory system: This method continuously tracks your inventory levels in real time. You’ll update your records with every transaction, providing accurate inventory data and helping you make better decisions.
Setting Up Your System
To make inventory management for a small business successful, you need to set up your systems the right way. A good inventory management system should include the following components:
Identification System
You need an identification system. Your identification system can involve manual recording, numbers in a spreadsheet, or a barcoding system that tags each item. It could also be something a little more complex, such as a radio frequency identification system using microchip tags.
With an identification system, you can ensure accurate inventory tracking, location, and counting. This helps reduce mistakes, keeps inventory data available, and prevents stock loss.
Management Software
It’s hugely beneficial to have a centralized computer system for inventory management in small businesses like UpKeep, MaintainX, and Fiix.
You can use a CMMS to record, track, and report insights on an ongoing basis. It’s also best to integrate an inventory tagging system with a CMMS to gain real-time insights into inventory data and make better buying decisions.
Standardized Procedures
For your system to work properly, you also need to develop and implement clear, consistent, standardized operating procedures. What we mean by this is having easy-to-understand processes for tagging, documentation, and reporting requirements.
With this system in place as part of your overall inventory management system, you can ensure you gather high-quality data. You can use this data to forecast demand more accurately, reduce waste, and control cash flow.
Key Metrics to Track
There are several key performance indicators (KPIs) you need to track for inventory management in a small business. The below KPI’s will help you see how your business is actually performing.
You can also use these KPI’s to compare the success of your Canadian business with your competitors in the industry. You may even be able to use some of the metrics data to identify where in the supply chain you could be losing money.
- Stock-to-sales ratio: You can use this metric to track how your monthly product sales relate to your stock amounts for monthly forecasting.
- Sell-through rate: Your sell-through rate shows you how long an item has been in stock before it was sold. You can use this metric to find out if your pricing is too high. You can also use it to determine when you should reorder stock or hold off.
- Average inventory: You can learn how much you are storing at different times by calculating your average inventory measurement. To do this, you’ll compare the amount of inventory you have in any given month with numbers from past months.
- Line-item-fill rate: With this metric, you can see how well you fulfilled your business’s orders. You’ll calculate this by comparing the numbers on initial orders with the number of line items you actually mailed out.
Common Inventory Challenges
Managing one’s inventory can be challenging, which is why many small business owners make common mistakes. However, the mistakes that often top the list include overstock or understock problems. When you order too much, it can create waste and limit your flexibility. On the other hand, ordering too few leaves can leave shelves empty and upset customers.
Another mistake that can be incredibly detrimental is human error. Unfortunately, many businesses have to contend with miscounted stock, outdated records, and mislabeling. These issues can skew data and lead you to make poor decisions.
You also need to be wary of seasonal demand swings. Unfortunately, even if products sell out during one season, it doesn’t mean they will the next. It can be hard to get the full picture of your stock levels at the full price, but it’s something you need to consider.
Inventory and Cash Flow
It might be difficult to believe, but inventory has a direct influence on your company cash flow. For example, too much stock can tie up money that you could use for marketing, payroll, or growth. However, too little stock could limit your sales and slow revenue.
It’s a dual-edged sword, which is why smart inventory tracking is important. It can help you balance purchasing and demand so your money remains available when you need it.
However, if cash flow is tight and your money is tied up in inventory, you can consider financing options such as a merchant cash advance. With a merchant cash advance from Bizfund, you can secure funds when you need them most to restock without disrupting your daily operations.
The Key Takeaways for Inventory Management for a Small Business
Inventory management for a small business can feel like a big step, but it’s necessary if you want to succeed in Canada. Hopefully, our beginner’s guide has given you a good starting point for building a strong foundation for growth.
Even if you only apply a few of these small changes, such as organizing your stock or implementing a standard operating process, they will lead to big improvements over time. And of course, no system is perfect from day one. You’ll make mistakes and need to course correct a time or two, but eventually you’ll establish a stellar inventory management system.
So take it one step at a time and don’t feel you cannot accept financial help. At Bizfund, we’re here to help you succeed. Our merchant cash advances of up to $300,000 are here to help you achieve your business goals.
