Is your small business part of the 43% that don’t track inventory, or do so manually? As one of the biggest costs in retail, stocking the optimal amount of inventory can shape the trajectory of any small business. The value that inventory tracking brings to small businesses cannot be overstated. Here, we outline the basics of inventory management and explain the value of investing in inventory tracking technology.
Accurate Cost of Inventory
As a small business owner, keeping tabs on your inventory isn’t just about counting how many items are sitting on your shelves. It’s about understanding the monetary value of those goods and how they contribute to your bottom line. Here’s why knowing the accurate cost of your inventory is crucial for the success of your business:
Financial Health: Your inventory represents a significant portion of your assets, and its value directly impacts your financial statements. Real-time inventory tracking ensures that you know what your inventory is costing your business at any given time.
Profit Margins: Understanding the cost of your inventory allows you to calculate your profit margins more accurately. By knowing how much you’ve spent on acquiring goods, you can set appropriate selling prices to ensure profitability.
Decision Making: Accurate inventory valuation plays a crucial role in making informed business decisions, from expanding your product line, to adjusting pricing strategies, or optimizing reorder quantities.
FIFO Method: First-In, First-Out
As the most commonly used method for inventory tracking, the FIFO (First-In, First-Out) method records the oldest inventory as sold first. Cost of goods sold (COGS) is calculated based on the cost of the oldest inventory in stock, while the ending inventory is valued at the cost of the most recently purchased items.
Imagine you own retail store that sells work gloves. The first order of 10 gloves from your vendor cost $4/pair, but due to inflation, the second order of the same gloves cost $5/pair. With FIFO, when a customer purchases the gloves, the sale is recorded using the cost of the gloves at $4. Once the initial 10 pairs of gloves are sold, the cost adjusts to $5/pair. This ensures that the cost of goods sold reflects the actual expenses incurred to sell your product.
Incorporating FIFO into your inventory tracking practices can enhance the accuracy of your financial records, which is particularly beneficial during times of fluctuating prices or inflation, as it matches current revenues with older, lower-cost inventory. It also improves decision-making for your small business by reflecting the current market value of your stock more accurately. It’s a method well worth considering as you strive for greater efficiency and profitability in your operations.
On-Hand Inventory Knowledge
For small retailers, having a clear understanding of the quantity of product on hand is paramount. This knowledge goes beyond mere convenience; it’s a cornerstone of effective inventory tracking. Here’s why knowing your on-hand inventory is crucial:
Customer Satisfaction: Imagine a customer walks into your store looking for a specific product, only to find it out of stock. This can lead to frustration and disappointment, potentially driving them to seek out competitors. By knowing exactly what you have on hand, you can ensure you have the right products available when your customers need them, thereby enhancing their satisfaction and loyalty.
Prevention of Overstocking or Understocking: Maintaining optimal inventory levels is essential for keeping costs in check and maximizing sales opportunities. Knowing the quantity of products on hand enables you to avoid overstocking, which ties up valuable capital and storage space, or understocking, which can result in lost sales and missed revenue.
Efficient Operations: Accurate knowledge of on-hand inventory facilitates smoother day-to-day operations. It helps streamline order fulfilment processes, reduces the time spent searching for products, and minimizes the risk of shrinkage due to damage, theft, spoilage or errors such as miscounts or misplaced items. It also helps This efficiency translates into improved productivity and cost savings for your retail business.
Replenishment Method: Inventory Ordering
The replenishment method is a proactive approach to inventory ordering that involves replenishing stock levels based on predetermined triggers rather than waiting until items are completely sold out. This method aims to maintain optimal inventory levels to meet customer demand while minimizing excess inventory and associated holding costs.
The replenishment method continuously monitors inventory levels, and recommends stock ordering when predefined thresholds are reached. A point of sale solution with built-in inventory tracking can use used to automatically set thresholds such as vendor, date range, and desired maximum stock levels. Retailers can avoid stockouts and ensure a steady supply of products for customers by proactively restocking inventory before it runs out.
Implementing the replenishment method as part of your inventory tracking strategy can help your retail business operate more efficiently, deliver better customer service, and achieve cost savings in the long run. By staying proactive and keeping a close eye on your on-hand inventory, you can set your business up for success in today’s competitive retail landscape.
Understanding Customer Purchases
In the dynamic world of retail, gaining insight into customer purchasing behavior is akin to unlocking the secret to success. Understanding what your customers buy, when they buy it, and why they buy it is invaluable for small business owners. Here’s why:
Tailored Product Offerings: Analyze customer purchase patterns to identify popular and underperforming products. Then, tailor product offerings to better align with customer preferences, thereby increasing sales and customer satisfaction.
Targeted Marketing Strategies: Knowledge of customer purchases enables you to develop more targeted marketing strategies. Promotions, advertising campaigns, and product recommendations are all marketing initiatives that can be used to resonate with customer interests and preferences.
Inventory Optimization: Understanding customer purchasing behavior helps you optimize your inventory tracking practices. Stocking products that are in high demand and phasing out those that aren’t selling well improves inventory turnover rates, reduces carrying costs, and maximizes profitability.
Leveraging Point of Sale Reports for Business Decisions
Point of sale (POS) reports, such as the Items Sold Report, provide valuable data on the products that customers are purchasing. These reports offer insights into sales trends, popular items, and customer preferences, so you can make data-driven decisions to drive business growth.
The Items Sold Report identifies top-selling items to allocate resources more effectively. Respond to shifting customer preferences by identifying sales trends and patterns to proactively prioritizing inventory replenishment. The Items Sold Report can also help identify opportunities to feature popular or complementary products in promotional campaigns, or offer discounts on slow-moving inventory.
By leveraging point of sale reports such as the Items Sold Report, small business owners can gain valuable insights. With the right data at your fingertips, inventory tracking can drive business growth and enhance the overall customer experience.
Inventory tracking is much more than just counting products on shelves. It’s a strategic tool that empowers small businesses to optimize operations, maximize profitability, and deliver exceptional customer experiences. By investing in a point of sale solution with built-in inventory tracking, small businesses can gain a competitive edge in today’s fast-paced retail landscape.