How Small Businesses Can Improve Inventory Management

Once you have an inventory count, you can figure your “open-to-buy” (how much you can purchase based on what you already have in your store). You should also get a better picture of your “shrink,” which is the difference between what you thought you had and what you actually have– usually caused by not checking invoices, mis-keyed items and theft. And you can plan changes. “Without a physical inventory you do not have accurate information,” Phibbs said.

Here are some other tips for improving inventory management:

1. Oversee ordering. Carefully manage the order points for inventory – the “who-orders-what-when” side of the business. Utilize a system that allows the business to order quickly when needed so your cash isn’t tied up in merchandise.

2. Study sales. Watch the sales patterns of goods to learn what’s sitting for too long or not moving at all. If sales of certain items are low, discounts may be necessary to get them out and replaced with something that will move.

3. Examine inventory. Continuously look at your inventory on a product basis to see what’s moving. As with your study of sales, doing this may lead you to offer discounts to get overstocked or undesirable merchandise off the shelves so that fast-selling inventory can replace it. Discounts may also attract more customers to the store.

4. Fine-tune forecasting. Make sure your business is using a good system to forecast inventory needs. You want inventory levels to be as low as possible without adversely affecting the business. Here’s where your accountant may be able to provide valuable experience-based advice on how to use your bookkeeping system more effectively, how to improve internal controls or how to otherwise view and manage inventory.

5. Study suppliers. Identify not only your current suppliers, but also some options. Those alternative suppliers may be eager to earn your business. “Pressing suppliers to deliver inventory quickly to you allows you to utilize the supplier for warehousing,” McNeilly said.

“Having a better understanding of available suppliers and their pricing and delivery capabilities, along with a better understanding of your inventory needs will allow for quick improvement on cash flow.”

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Mary Ellen Biery is a research specialist at Sageworks, a financial information company that provides financial analysis and benchmarking applications to accounting firms and private companies. She is a veteran financial reporter whose works have appeared in The Wall Street Journal and on Dow Jones Newswires, CNN.com, MarketWatch.com, CNBC.com, and other sites. She received her undergraduate degree from Wake Forest University, where she graduated cum laude, and her master’s degree from the University of North Carolina at Chapel Hill.