Cash Flow Solutions

7 Inventory Management Concepts You Need to Know

Woman tracks her inventory on clipboard

Why is inventory management so important to a small business owner? When you consider the facts that employee theft accounts for more than $40 billion in loss for retailers each year and stale or unsellable inventory accounts for many more billions of dollars wasted, you can begin to see why it’s necessary to understand the basics of inventory and have a good system in place to manage it.

The following inventory management concepts can help you better understand the flow of your inventory from ordering through shipping and returns.

7 Key Inventory Management Concepts

Ordering Products

How you choose to purchase your merchandise will define your ordering method and quantities you will need to reorder. This should be based on your return on investment. Large retailers have the benefit of using distribution warehouses and complex systems that break each item into smaller units to ship and to store as items are ordered.

Smaller businesses need to watch ordering even closer because of space and financial limitations. Thus, monitoring sales trends and specific products to determine the needed replenishment amounts is absolutely essential. Start by acquiring an inventory book where you can record all items, as well as changes to them. Make note of fast and slow moving products and compare your revenue against carrying costs to figure out which products are the most profitable for you.

Receiving a Shipment

A key point of loss is at the time of receiving inventory. Closely reviewing packing slips to catalog shipments is necessary for inventory management. You will also want to carefully inspect items before the shipping company leaves in case you need to file a damage claim. Each shipment should be closely checked, and this should include counting products and comparing them to the packing slip. Variances need to be noted, and if need be, a claim will have to be filed with the vendor responsible for the shipment.

Storing Inventory

After receiving your products, you will need to decide where they should be placed. Will you be using your garage, a local warehouse, or a distribution facility that will both store and ship your products? Whatever you decide, develop a systematic way to be able to find your products. For example, a supplier of buttons might use bins with numbers to map out what she has in stock. Once this system is in place, you will not only simplify for yourself the picking process when there is an order but also for any staff that you might hire to help you.

Minimizing Loss

Most of us think of loss as theft. However, a substantial amount of loss simply occurs due to clerical mistakes. These mistakes can occur at any point during the inventory cycle. Incorporating loss prevention techniques can help prevent these costly problems.  Managing your inventory effectively may require implementing a variety of loss prevention techniques including utilizing security cameras to reduce customer and employee theft, using security tags, limiting access to inventory, and carefully monitoring customer returns.

Taking Regular Inventory

Inventory management also includes taking periodic inventory for tax purposes. Inventorying more often can also help you better understand loss trends and the amount of unsold merchandise. Consider having scheduled inventory days when employees check inventory for quality and age. This is the time to weed out old products by having clearance sales or special promos to liquidate merchandise.

Inventory Management Solutions

If you sell products, a inventory management solution is something that you definitely need to consider. There are many to choose from that are designed specifically for small businesses. Most inventory systems currently available will help you oversee the flow of your products, create invoices and purchase orders, generate receipts, and control inventory-related accounting for you.

Inventory Consultants

Very few small businesses have the luxury of being able to hire a dedicated inventory control manager. However, there are outside consultants that can help you develop and manage your internal inventory management system. A qualified consultant can help you maintain accuracy while helping you to manage shipping and receiving and order-picking operations.


The most successful small businesses take inventory management seriously because it can have such a profound impact on the bottom line. By putting the right inventory management systems in place early in the development of your business, you can help set a foundation for success as you grow, and you can substantially minimize costly loss due to theft and errors. If you are in need of an inventory loan to help you improve upon your inventory management processes, turn to Kabbage.

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