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How to Organize Inventory for Small Businesses in 8 Steps


Inventory management is the process of having the right products, in the right quantities, at the right time to sell to customers. Accurately managing inventory can increase revenue by preventing stockouts, excess inventory, and unsold products. When learning how to organize inventory for small businesses, the easiest solution is to use a software program to automate the process.

We recommend using an integrated POS system like Lightspeed to automate your inventory management procedures. It will streamline your inventory management processes, save you time, ensure accurate and up-to-date records, and provide reports and insights to help you understand your bottom line.

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If you’d rather manage inventory manually with a spreadsheet, download our free template and follow the steps below.

Showing inventory management process.

Inventory management is an 8-step process that can be done both with an automated system or manually.

Step 1: Organize Product & Vendor Information

The first step in organizing your inventory is to set up your stock and supplier information in a reliable and accessible system. Some businesses use manual tracking methods such as spreadsheets. However, the best option for retailers is to use a point-of-sale (POS) system that will keep a vendor directory and searchable product pages for you.

There are lots of POS systems to choose from, and they all have unique inventory systems. Read our article to learn more about the best POS inventory systems and how they can perform for your business.

To organize your products, you’ll first need to record information about each item and file it on a product page. The product-specific information you should include is:

  • Product name
  • Quantity
  • Your internal product stock-keeping unit (SKU) number
  • Manufacturer’s Universal Product Code (UPC)/European Article Number (EAN) or other unique identifiers
  • Short description
  • Product category, class, or family
  • Wholesale cost
  • Regular retail price/MSRP
  • Your selling price
  • Colors or sizes
  • Vendor, supplier, or manufacturer name
  • Reorder quantities
  • Shipping details: size, weight, box pack, cost, dispatch time, etc.
  • Picture or product image
Showing an example of Lightspeed product details.

Lightspeed allows you to make detailed product pages where you can store all of your product information. (Source: Lightspeed)

In addition to creating a log of your products and their information, you will need to file your vendors’ information into your system. That information should include:

  • Vendor name
  • Vendor contact name
  • Vendor billing information
  • Vendor phone
  • Vendor email
  • Vendor website
  • Order volume
  • Payment terms
  • Line rep or showroom contact

Build Relationships With Product Suppliers

Even with the best inventory management plan, issues can still arise where you need products ASAP to fulfill an order. When this happens, retailers are at the mercy of their suppliers. If there is a quality control issue or a discrepancy with a purchase order (PO), having a good relationship with your supplier can help resolve these issues quickly.

Retail and ecommerce businesses can build strong relationships with product suppliers by sticking with the same suppliers over a period, meeting suppliers in person at trade shows, and, perhaps most importantly, paying invoices on time.

Step 2: Create & Submit Accurate Purchase Orders

Essentially, POs are buyer-created receipts that document the sale of products to be delivered on a future date. They are the easiest way to manage your inventory purchases, letting you track every stock purchase efficiently, from placing the order to receiving the shipment and paying the bill. POs are financial transactions, so create them when you have time to review your cash flow and realistically forecast your stock needs.

Showing Lightspeed Retail built-in vendor directory.

Lightspeed Retail has a built-in vendor directory and product catalog so that businesses can send POs directly through their software. (Source: Lightspeed)

Keep track of your POs so you have a record of everything you purchased from your supplier and can cross-reference your deliveries with what you actually expected to receive. This will help you stay on top of your inventory counts and prevent shrinkage.

For example, say I want to order 300 pairs of shoes from my favorite supplier for this coming spring. I would fill out a purchase order form with the exact shoes and quantities that I want, see the total price, and submit my PO to the supplier with a delivery date. Then, in the spring, when my shoes get delivered, I can use my PO forms to make sure that my quantities, sizes, and models arrive accurately.

Purchase orders are typically submitted to vendors electronically through email or via the vendor’s online ordering portal. If your vendor does not have an order form, you can download our purchase order template to make things easier. Alternatively, there are features within POS systems like Lightspeed that you can use to make your POs easier and more efficient.

As mentioned before, many POS systems have directory features to manage vendor contact information, and some even allow you to send POs directly from their interface. POS systems also have low-stock alerts that tell you when an inventory item reaches a designated minimum threshold and when you need to place a new PO. This will help you prevent stockouts and the accompanying disappointed customer.

Step 3: Receive Inventory Orders Accurately

Once you have submitted your purchase order for the right amount of stock, you want to be sure that you receive that stock accurately. Supplier errors happen often, and if you aren’t being diligent about systematically receiving your inventory, you might get shorted, overcount, or underestimate your inventory levels—which can lead to shrinkage and a decrease in your margins.

To receive inventory correctly, companies should receive and unpack all boxes in the same space, count each box, and check the items received against original purchase orders.

Receiving inventory accurately.

Receiving your inventory accurately will ensure that you have a good understanding of your stock and that you are not missing any items. (Source: Highway Logistics)

It’s especially important to ensure that you check all received items against your PO. Suppliers generally include packing slips that list the items and quantities in your shipment. While this slip will likely match the physical shipment, if the supplier made an error during order entry, the packing slip would not match your PO, and the quantities would not be accurate.

If you do not catch order discrepancies by checking the received items against your PO, you run the risk of thinking that you received stock that didn’t actually arrive. That leads to stock shortages, backorders, and, ultimately, cash losses.

How to Accurately Receive Stock Shipments

  1. Unpack the shipment and organize items by product.
  2. Ensure that you receive all boxes, containers, or other units in the shipment based on your POs.
  3. If the counts and products match, file as received physically or in your POS system.
  4. If you find errors like wrong, shorted, or missing items, note these on your PO and contact your supplier immediately to resolve them.
  5. Shelve or store all correctly received stock (tag or label first if needed for your system).
  6. Enter your bill into your accounting system.

Step 4: Tag & Label Inventory

Once your products are physically on hand, you will need to tag and label your inventory so it is ready for the floor and organized internally. Your tags should include two main things:

  1. Price: The selling price of your item. All your inventory will need this before it can go out on the floor and be customer-facing.
  2. Product Labels: You should have some sort of labeling system for your inventory so that you can easily organize and track it internally. We recommend a barcode system to make things easy both for customer checkout and your inventory management processes.

Regardless of the type of labels you use, a good time to tag and label inventory is during the stock receipt process. That ensures the task isn’t overlooked and prevents the unlabeled stock from being shelved or displayed for sale.

Once printed, labels can be fixed directly to product packaging, on their price tags, or in their shelving areas. Some inventory might even arrive prelabeled with the manufacturer’s bar codes, which you can also track in your POS. In that case, if you’re not using SKU numbers, your job is easy. You can just add a price label.

Step 5: Organize Your Stockroom or Warehouse

Having an organized stockroom will not only make things easier to find for you and your employees, but it will also allow you to fit more merchandise and keep better tabs on the inventory you already have.

In retail stores, tall storage shelves or double-tier hanging racks can maximize your wall space while allowing movement and easy access. Additionally, storage bins can be stacked and labeled on the ground to use floor space efficiently.

In larger warehouse settings, there is typically more room to store goods within aisles that have built-in shelving and hanging storage. The biggest thing you will want to ensure is that you are choosing storage devices that make sense for your merchandise and can change over time.

For example, at my boutique, we had a small storage room with very little space, so we used lots of hanging racks and stacked bins to maximize what we had. The racks were easy to roll, and we could label them any way we needed with rack tags. Similarly, the bins were great for our heavier/knitted items that took up too much hanging space or couldn’t be hung up and were easy to label depending on the inventory we had on hand.

Whatever your inventory storage method, your stored inventory needs to be well-organized, clearly labeled, and accessible for pulling and inventory counts. This can be done using the boxes goods come in, stacking bins, or even hanging separators for hung apparel.

Showing a a well-organized stockroom.

A well-organized stockroom will make life easier for your employees and will help you spot stockouts and see your inventory levels. (Source: arxiusarquitectura)

Step 6: Track Inventory in Real Time

Tracking your inventory levels in real time is key for keeping the right items on the shelves in the right quantities—i.e., good inventory management. Whether by hand or through your POS system, a sound inventory management system records every sale in detail and adjusts inventory levels as each item is sold.

Tip: There are some great inventory management software that you can use to help stay on top of your inventory. Learn more about the top products on the market with our inventory management software guide.

While you can use a spreadsheet for real-time inventory tracking, we recommend a POS system to streamline this process dramatically. POS systems track real-time inventory levels and adjust your counts with every sale. As your inventory numbers dip below your safety stock level, you can set up reorder alerts, stockout warnings, and automatic PO generation. A POS system will make tracking inventory levels and reordering your supplies quick and easy and, most importantly, will base your inventory on actual sales trends, not on your best guess.

Step 7: Conduct Regular Inventory Counts

Physical inventory counts can be mundane and tedious. However, physical counts can reduce all types of inventory problems dramatically. Most small businesses do a full inventory count once each year for tax purposes, but it’s good to perform smaller partial inventory counts, or cycle counts, even if you are using a POS system.

Quantity on Hand

The basis of both annual and cycle inventory counts is your current Quantity on Hand (QOH) or the amount of inventory you should have in stock for every item you carry. The formula for QOH is as follows:

QOH = (Previous QOH + Received Inventory)-Sold Inventory

Your QOH is the number that you will measure your annual and cycle counts against. So, for example, if I thought I should have 272 packs of gum based on my QOH calculation, I would be looking for 272 packs of gum in my cycle or annual count. If I found a discrepancy, say only 250 packs of gum, that would indicate an error or theft that I could then look into further.

Annual Inventory Counts

Annual inventory counts are a complete inventory count, typically done at the close of each fiscal year for income tax purposes. These counts give you an overall picture of how much inventory you have on hand at the close of your year. Annual inventory counts can also help businesses uncover inventory shortages due to miscounts, shrinkage issues, misplaced stock, and/or receiving errors.

While most retailers perform more frequent counts, some small businesses with limited staff or small inventories will only perform this type of inventory count each year. While annual inventory counts are a good practice regardless, by year’s end, it’s too late to fix most of the problems they reveal. To catch inventory issues before they become costly, you’ll also want to conduct periodic counts, called cycle counts.

Tip: Regular counts will also help you understand what stock is not moving and might need to go on sale to avoid incurring greater carrying costs or the expenses a small business must pay to hold and store unsold merchandise.

Cycle Counts

Cycle counts are periodic spot counts that take inventory of specific categories or subsets of products. For example, at my boutique, we would do a couple of cycle counts each week for different types of clothing—basics T-shirts one day, jeans another, earrings the next. Cycle counts helped us see how specific products were performing or determine whether it was time for a restock.

Typically, you perform cycle counts regularly. So you might decide to count shirts every other Wednesday and jeans every two months. As a best practice, you would cycle count all of your products daily to keep a good grasp on their levels. Without the right tech and staff, however, this is next to impossible. Schedule your cycle counts based on the speed with which you move through your inventory, with items that sell faster getting more frequent counts.

Manual or Automated Counting

When it comes to how you count your inventory, you have two options. You can either do it manually or use a POS system to automate your processes. Here, we will look at both manual and automated inventory management options and how they both can work for your business.

While we would suggest using a POS system to count your inventory for you, if you do decide to go the manual route, your first step will be tallying your QOH based on your POs, last year’s inventory, and a sales tally of each item sold. From there, you’ll need to create inventory count sheets to record your physical counts and begin counting.

While you can do it, manual counts are less accurate and more time-consuming than your automated POS option.

While a POS system can’t count all the physical items in your inventory, it can place live QOH counts and inventory lists at the tips of your fingers to help accelerate and streamline your inventory counts. We suggest a POS system to help eliminate errors in your inventory management and make your business more efficient.

If you do decide to go with a POS system to count and track your inventory, we recommend Lightspeed. It keeps live QOH counts as you receive and sell items, continuously tracks your inventory levels, alerts you to low stock items, and provides reports and data to help you better understand and manage your inventory.

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Step 8: Reconcile Discrepancies

Ideally, your physical inventory counts will match your projected QOHs. However, that is not always the case. If you have more or less of a product than anticipated, you will need to investigate the problem and reconcile the difference. In retail, this difference is known as shrink.

Shrink: The difference between the number of products you thought you had and the number you actually have in your inventory.

There are two primary reasons that inventory shrinkage occurs. Either there has been a clerical error or theft has occurred. Sometimes, clerical errors are not actual losses—an item could have been misplaced or a key mistyped. Other times, shrinkage indicates actual loss and you should investigate where it happened so you can work on preventing it in the future.

If you determine that your missing merchandise is truly gone, you should adjust your QOH in your records. After that, you need to record the dollar value lost due to the shrink in your inventory.

Bottom Line

A good inventory management system means that you always have an accurate picture of your stock so that you can avoid waste and provide the merchandise and experience that your customers expect. Whether you’re looking to learn the basics of how to organize inventory for small businesses or reinvigorate an existing system that has become disorganized, these steps will help you set up and streamline your operations.

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