Why Is Inventory Management Important for Your Small Business?

Businesses are unsuccessful for many reasons, but if you compare a successful company to one that is floundering, you'll often find a big difference in how the two manage their inventories.

The purpose of inventory management is simple: to ensure your business operates in the most efficient way possible. Your product can sell like hotcakes, but it won’t matter if you aren’t able to get it out the door and to the right customers in a timely manner.

But what is inventory management exactly, and why is it important for your business? We'll break down what you need to know and how you can do things better.

What is inventory management?

Inventory management refers to a business's process for keeping track of everything it owns, from materials to equipment to products.

Businesses use inventory management software not only to account for everything and conduct inventory costing but also to assist with creating work orders and producing other documentation important to the functioning of the business.

It helps a business avoid the costs or lost revenue that come with overstocking or running out of supplies. For very small businesses, a spreadsheet may be enough to track inventory, but most businesses benefit from having more advanced software because of the importance and complexity of warehouse inventory management.

Effective inventory control has eight key benefits for small businesses.

1. It prevents overstocking

Overstocking is a problem for businesses because the excess inventory takes up valuable warehouse space, and it forces you to allocate labor resources to moving and tracking all that inventory you don't need. It also cuts into cash reserves needed for higher-priority assets.

Inventory management tracks what inventory you have and helps forecast what you need, reducing the likelihood of overstocking.

Quick tip: Use your sales history to forecast future demand. You'll be better able to avoid overstocking when you use past sales to predict how much inventory you're likely to need this quarter.

2. It prevents shortages

In addition to preventing overstocking, inventory management avoids the opposite problem: shortages. When a business runs out of product, it's unable to fill sales orders, leading to lost revenue and leaving the company scrambling to replace the inventory.

The business may spend more on expedited shipping to deal with the problem, and risks over-correcting and ordering too much inventory, resulting in overstocking. Inventory management helps managers understand what current inventory levels are and what is needed to meet demand.

Quick tip: Boost your inventory forecast if you're running a promotion or new marketing campaign. Past sales data indicates how much inventory you should have during normal conditions, but if you're boosting sales through a promotion or marketing campaign, estimate how much of an increase over that baseline you're likely to see.

3. It makes your company more organized

Inventory management organizes your business on a foundational level, which helps the company run better. When things are chaotic in the warehouse, they're chaotic in the front office.

By having control of your inventory, you can focus on high-priority but non-urgent tasks that will grow your company, rather than running around putting out fires all the time.

Quick tip: Centralize your stock control system to avoid mistakes. This is especially important if you sell through multiple channels, such as Amazon, Etsy, brick-and-mortar stores, or directly to consumers. Software will help you do this -- it's unwise to try to do it through spreadsheets.

4. It saves on overhead

When you don't have good inventory management, inventory is being ordered and stored in any old way, which is inefficient.

When you have a good system in place, you're operating more efficiently, putting the highest-selling products in the most accessible area of the warehouse and taking other steps to optimize the inventory system. This saves money on overhead, which goes directly to your bottom line.

Quick tip: Use the 80/20 rule when managing your inventory. The 80/20 rule, also known as the Pareto principle, stipulates that about 80% of the positive outcomes in your business come from 20% of your activities. In the case of inventory management, identify the 20% of products that are responsible for 80% of your revenues and focus your inventory management on efficiently processing those items.

5. It saves time through automation

Workers spend a lot of time on manual data entry and form-filling. Many of today's software options automate these tasks, saving your workforce time and freeing them up for other high-priority tasks.

Quick tip: Choose software that offers a range of automation features. The software should not only fill out forms for you automatically and track important data like inventory turnover ratio but also monitor sales projections and alert you when inventory is running low.

6. It improves order accuracy

Returns are costly for a business. Effective inventory management improves the accuracy of your filled orders and lowers the likelihood that you will send the wrong product to the wrong customer or submit the wrong order to the wrong supplier.

Quick tip: Audit your inventory system every now and then. Even if you're happy with how things are running, you'll notice hidden efficiencies if you take a peek behind the curtain every once in a while. Track inventory data so you'll have the numbers necessary to make those assessments.

7. It increases productivity

Organized inventory management leads to a more efficient and productive workforce. If you want to get more out of the workforce you have, give them the tools they need.

Inventory management software will have them spending less time fixing incorrect orders or searching through the warehouse for the right product.

Quick tip: Talk to your workforce. Your workers are your eyes and ears in the warehouse, and they can tell you how well your inventory management system is working. Are they having trouble reaching a popular product because of where it's stored? A quick reorganization of your inventory stock could save you a bundle. Is your system too bureaucratic? They can tell you ways to speed things up and get products to your customers faster.

8. It pleases customers

Happy customers are returning customers, and good stock management is how you ensure that. By filling customer orders on time and accurately, your customers will know that they can depend on you to satisfy their needs.

As a result, you'll build a strong base of loyal customers who will serve as the foundation for your future growth as a company.

Quick tip: Survey your customers from time to time. While you may not be getting complaints from customers, that doesn’t mean everything is fine. Customers could be cutting back on orders if they find that another company can fill them more efficiently. By sending a periodic survey, you can identify potential problems in your inventory management system, however small, that are costing you revenue.

Overhaul your inventory management system with new software

If you're considering overhauling your inventory management system, start with finding good inventory management software. Once you find a software solution you like, you can build your new system around this software.

It's easier to do it that way than to decide on an inventory management system and then try to find software that fits one of the inventory management types you’ve chosen after the fact.

Check out The Ascent's reviews of top inventory management software and choose two or three that appeal to you. Sign up for a trial and play around with the platforms a little bit, and then settle on one to build your inventory management system around.

It will immediately make your life easier and free you up to focus on other important work in your business.