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Starting a business

Small business inventory management

5 min read

We’ve all been there as customers – you turn up for your favourite treat and it’s sold out. By taking a smart approach to inventory management, you could not only keep your customers happy, but reduce excess stock. In this guide we’ll look at what inventory management means and examine different ways of managing stock.

What is inventory management?

Inventory management is a balancing act. If you run a business that has stock to shift, the chances are you keep these products in a storeroom, depot or warehouse before you sell them to the public. Inventory management simply refers to the quantity of stock you order, and how often you replenish it.

Why is inventory management important to my business?

Cash flow is the lifeblood of a business, but piling up products in a warehouse can cost money, and impact your bottom line in the short-term. Making sales usually means money in the bank for businesses, which means you may have the ability to pay staff, meet your tax responsibilities and grow your company. But equally, to achieve these goals you need a healthy balance sheet and some measures in place so that you don’t overspend on stock.

Before we explore some inventory control techniques, let’s look at the balance of risks between having excess stock and being ‘out of stock’.

Excess stock – the risks

  • Capital costs – buying goods costs money, and these prices can be unpredictable as levels of supply and demand can be volatile. Fashion retailers, for example, faced challenges of surplus stock when demand plummeted in the wake of the coronavirus pandemic
  • Storage costs – for your products to be safely handled, stored, insured and kept in good condition, you may need to spend some money. If you have your own warehouse you may be able to reduce some of these variable costs, but you’ll still have to pay for fixed costs like electricity and rent
  • Opportunity costs – every penny you spend on excess stock is money that could otherwise be invested in your business, from hiring staff to training programmes

Low stock – the risks

  • Lost income – simply put, every time a customer wants an item and you don’t have it in store, you’ve missed out on a sale
  • Customer dissatisfaction – frustrated customers may leave a bad review, or choose to shop elsewhere, which may give your competitors an advantage
  • Restocking costs – unplanned restocking, and looking for items in a warehouse, could cost you time and money

Inventory control techniques

Carefully planned inventory control techniques could help you get the balance right between managing stock supply and demand. Here’s a summary of some tried-and-tested inventory management methods.

First In, First Out (FIFO)

The principles of First In, First Out inventory management are that the first products you receive are the first ones that should be sold. This technique is especially useful if you’re selling highly perishable products, such as fresh food or flowers.

There is also a Last In, First Out (LIFO) inventory management technique, where the item you receive last is the one you sell first, but this is only used in the USA as it’s forbidden under the International Financial Reporting Standards.

Just-In-Time (JIT)

Just-In-Time inventory management is where goods are moved just before they’re required, which reduces the need for excessive (and expensive) storage space. By keeping stock levels low, you could reduce your costs and avoid waste on products that may become unsellable. It’s a gamble that could pay off, but you’ll want to make sure you don’t sell out too quickly and that your customers can get what they’re looking for.

Par levels

Setting a ‘par level’ means you’ve decided the minimum volume of a product that must always be available to hand. As soon as a product’s supply dips below its par level, you or your team could immediately order more stock. This is a useful method of stock control, but you’ll need to continually assess par levels to make sure you’re not over or under-ordering compared to sales.

Long-term forecasting

Having some oversight over your sales history could help you make an educated decision about how to manage stock levels in the future. What were your sales like in the same month of the previous year? Are there any seasonal trends in the industry as a whole? Looking at the bigger picture can help you plan everyday stock control methods.

Contingency planning

Planning for a rainy day means you may be better prepared if and when a number of problems occur. For example, instead of having excess stock, sometimes businesses simply can’t cope with demand. You may experience a sales spike, only to find the warehouse shelves are bare. Alternatively, your supplier may have let you down, or you may have miscalculated your cash flow due to errors in your bookkeeping. Having a ‘worst case scenario’ for dealing with different crises is a crucial part of inventory management.

Five ways to shift excess stock

Managing stock when you’ve got a warehouse chock-a-block with items can be a challenge. Here are five handy tips for getting rid of those unwanted items in your inventory.

  1. Online promotions. Giving customers a discount is one way of making your unsold stock more appealing and could free up valuable storage space.
  2. Free delivery. Dropping delivery charges is a good carrot to dangle for your customers particularly if you sell small items. This could encourage them to make repeat purchases.
  3. Loyalty incentives. By rewarding the customer with every purchase, you could build affinity with them and start decluttering your storage shelves.
  4. Sales events. Flash sales could be a good way of building hype and offloading products. Plus, staff sample sales may help create a feeling of belonging among your wider team.
  5. Donate to charity. Giving away stock to those in need is a generous thing to do, and from a business perspective, can increase your storage capacity and potentially even land you some positive PR.

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This has been prepared by Tyl by NatWest for informational purposes only and should not be treated as advice or a recommendation. There may be other considerations relevant to you and your business so you should undertake your own independent research.

Tyl by NatWest makes no representation, warranty, undertaking or assurance (express or implied) with respect to the adequacy, accuracy, completeness, or reasonableness of the information provided.

Tyl by NatWest accepts no liability for any direct, indirect, or consequential losses (in contract, tort or otherwise) arising from the use of the information contained herein. However, this shall not restrict, exclude, or limit any duty or liability to any person under any applicable laws or regulations of any jurisdiction which may not be lawfully disclaimed.

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