Inventory management for small business: a simple system

Inventory management means knowing what stock you have, where it is, and when you need more. A shop with one to a few locations needs three records and a few habits that everyone follows, not special software.

If you are working out how to manage inventory for the first time, this guide covers what to record, where stock lives, counting, deliveries, moves and a routine you can copy.

Inventory management basics

Any system needs three records.

• A product list. A name, a code such as a SKU or barcode, the supplier, and the counting unit, such as a bottle rather than a case.
• Quantities by place. Units in each place you keep stock, which add up to the product's total.
• A movement log. Each change with a date, a reason and a name: a delivery, a sale, a move, a write-off or a count.

When a count comes out 6 units short, the log shows whether a delivery was never recorded or stock has gone missing. Any inventory management system for small business, whether paper, a spreadsheet or an app, should keep these records and make each entry quick enough for a busy shift.

Where stock lives: shelf, backroom and a second store

Stock usually sits in more places than you think: the sales floor, the backroom, a shelf behind the counter, perhaps a second store. Give each place a name a person can find, such as Backroom shelf A, and record quantities against it.

Counting by place shows that a product missing from the shelf has 20 units in the backroom, which store holds extra before you buy more, and where to recount when a figure looks wrong.

How to track inventory

There are two ways to keep the numbers current.

Perpetual vs periodic inventory

A perpetual system updates the record each time stock is bought or sold. A periodic system updates it at scheduled times, after a count. The OpenStax accounting textbook compares the two for bookkeeping.

A periodic system is simpler but blind between counts, so you find a shortage when the shelf is empty. A perpetual system is current at any time, but only if every delivery, sale and move is recorded. Most small shops mix the two. They record deliveries and moves as they happen, enter sales where they can, and count on a schedule to catch the rest.

Even a perpetual record drifts through theft, damage and mistakes. For a business that keeps inventories for tax purposes, IRS Publication 538 accepts a perpetual or book inventory kept by sound accounting practices. It still requires a physical inventory at reasonable intervals, with the book amount adjusted to agree.

The inventory management process, step by step

Set the system up once:

1. List every product with its code, supplier and counting unit.
2. Name each place stock is kept, in every store.
3. Count each place before you open or after you close.

Then run this routine, explained in the sections below.

Receiving deliveries

Before the driver leaves, count the cartons against the delivery note and check for damaged boxes. Then count the units against the invoice and note any shortage on the paperwork for a supplier credit.

Record the delivery once, on the same day, at the place you put it, usually the backroom. A later count of the same units replaces the figure rather than adding to it.

Moving stock between places

A move from the backroom to a shelf, or from one store to another, changes where units are, not how many you own. Record both sides together, minus 12 in the backroom and plus 12 on the shelf, or the total goes wrong. Between stores, note who sent and who received the units, and check the count on arrival.

How often should you count inventory?

Count everything at least once a year, and a small part of the stock every week. If your business keeps inventories for tax purposes, IRS Publication 334 says you must value them at the beginning and end of each tax year, and many shops do their full count near year end. Ask your accountant what applies to you.

The weekly counts, called cycle counting, keep the record honest between full counts. Rotate so each place gets counted every month or two. Count these more often: fast sellers, expensive items and anything that was wrong at the last count. Count at a quiet hour, one place at a time, and write down what you see, not what the record expects.

When to act on low stock

Give each product a trigger level, the stock at which you order more or bring units in from elsewhere. Base it on how fast the product sells, how long delivery takes and a few days of buffer. The post on two numbers that make reordering easier works through the calculation. When a product hits its trigger, check the backroom and the other store first, since a transfer fills the gap today and an order takes days.

Inventory management tips

Stock management for small business depends more on habits than on tools.

• Let one person per shift sign for deliveries.
• Put new stock behind older stock so the oldest sells first.
• Record damaged goods before they are thrown away or returned.
• Write a reason next to every correction, so patterns of loss show up.
• Treat a place nobody has counted as unknown, not zero.

Running the routine in headoffis

In headoffis, every store has a Backroom and an Unassigned location, each fixture on the store map is a location, and you can add named locations such as a bin. Count / alerts sets the actual quantity at one location and an optional alert level. Receive stock adds a delivery. Transfer stock moves units between locations or stores without changing the total. Alerts lists products at or below their level, Stock activity shows receipts, transfers and counts, and Export stock CSV exports the quantities.

Counts are whole units, and a location nobody has counted shows as uncounted, not zero. There is no POS integration, so sales are entered in Sales & stats or corrected by a count. Purchase orders, lot or expiry tracking and stock valuation are not included.

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