What Is An Inventory Management System For Small Business? Full 2023 Guide

An inventory management system can save time if you’re a small business owner who is constantly entering product data into a spreadsheet or trying to keep track of your sales on paper.

Read on to learn what an inventory management system is, whether an inventory management system is right for your small business and the must-have features of any good inventory management software.

What Is An Inventory Management System?

An inventory management system will assist you in the process of overseeing all your business’s goods (raw materials, finished items, etc.) from when they are first acquired to when they are sold. The management system is here for the lifecycle of your products. Inventory management systems can track goods across locations and provide you with any details you need about that product to effectively run your business.

Benefits Of An Inventory Management System For Small Business

Small businesses don’t have the same cushion that larger businesses do when it comes to product/sales losses. When a business is operating on small margins, having a system to track inventory can make a significant difference in profits.

An inventory management system will allow small business owners to:

• Always keep products in stock, so you never miss a sale
• Invest in the right product quantity
• Provide accurate delivery information
• Give accurate prices
• Identify product damages, losses, and theft early on
• Keep track of which items are being returned and why
• Anticipate busy seasons and adjust your purchasing habits accordingly
• Hire more staff, or hire temporary staff, when large orders need picked and packed
• Rotate stock when necessary
• Identify which products are selling, and which ones should be discontinued

Types Of Inventory Management Systems

There are several inventory management systems that vary by how often you count stock and the method you use to measure stock levels.

Let’s look at the two most common types of inventory management systems: periodic and perpetual.

Periodic Inventory Management

Periodic inventory management is a system where you physically count stock levels once per period (month, quarter, year, etc.) and compare the number to sales figures. By doing this over time, companies verify whether there are items missing or too many items on hand.

This type of inventory management system works well for small businesses with limited stock levels and product variations. All you need for periodic inventory management is someone to physically count items and keep track of the information in a spreadsheet.

Larger businesses, or businesses with several types of product offerings, might struggle to take inventory periodically, as there are so many different orders coming in and shipping out at any given time.

Periodic Inventory Management Example

Let’s say you own a company that sells blazers. The company’s customer service reps take orders, enter them into a system, and employees in the company’s warehouse pick, pack, and ship out those orders. Since your company buys from a wholesaler, you also have records of how much inventory should be coming in.

At the end of every month, pickers physically count the number of blazers in the warehouse. You compare that number to the stock levels that you have on record.

If there are fewer blazers than what you have on record, then someone might have sent a replacement blazer but didn’t record it, or a picker might have accidentally packed an extra blazer without meaning to, or the wholesaler didn’t send enough stock.

Several of these scenarios could have occurred, but it’s hard to tell exactly which one without detailed information about every order. That’s why periodic inventory management doesn’t work for every type of business.

Perpetual Inventory Management

Perpetual inventory management is a system where stock levels are updated on a transactional basis. Each item has an identifier (UPC, SKU, etc.) and can be tracked. You can see exactly where items are at any stage of the order life cycle, from purchasing to sales to returns.

Perpetual inventory management systems give business owners the most up-to-date information on purchase orders, sales orders, stock on shelves, damaged items, and items returned. This type of system gives you the clearest picture possible of where your business stands.

However, perpetual inventory management systems can be expensive and time-consuming to use, if you choose the wrong one.

Perpetual Inventory Management Example

Let’s say you decide to implement a perpetual inventory management system at your blazer company. Every blazer is assigned a barcode label. Each label is scanned in upon a wholesale order delivery and each label is scanned out upon picking, packing, and shipping.

Customer service reps keep track of which blazers are included with which orders using the barcode numbers associated with each blazer.

With this system, you will know if your purchase order is missing items, whether a specific blazer is coming back as a return, where a customer’s late delivery is being held, etc. You can also send a blazer’s associated tracking ID to customers, so they can see where their package is in real-time.

10 Features Needed In An Inventory Management System

Depending on the type of business you run, you may not need all of these features in your inventory management system. However, if you ship out anything, sell in multiple locations, or deal with any kind of rotating stock, you will need most of the following:

1. Barcode Printing & Scanning

Barcodes are the key to tracking and selling any form of physical inventory. Whether you’re selling items in a physical location or housing thousands of items in different warehouses, every single item should have a barcode associated with it.

Good inventory management system providers will allow you to print and scan barcodes by integrating the company’s software with your own hardware. Many inventory management companies also offer their own barcode label printers and scanners for business owners to use.

2. Real-Time Inventory Updates

As soon as an order is picked, packed, and sent out for delivery, and whenever items come in, your stock levels should automatically update to reflect that. Items should be reserved whenever a purchase is made.

Your inventory should also show individual stock level changes even if items are bundled together as part of a larger sales order.

3. Support For Multichannel Selling

If you sell items on marketplaces like Amazon or Walmart, decide to make your Instagram posts shoppable, start selling on TikTok with a TikTok business profile, or sell online and in person, your inventory management system must support multichannel selling.

When you sell on different channels, you have to make sure that every item from every place is accounted for, or you might end up selling stock that you don’t even have. Multichannel selling reports can also give you insight into where your items are performing well, and focus on improving sales on those platforms.

4. Inventory Management Across Warehouses

If your items are held in different warehouses, then it should be easy to view, transfer, and bundle products across locations. You can also leverage reporting on the locations of buyers to determine which products should be held in which location.

5. Integrated Accounting

Your inventory levels are intimately tied to your sales numbers. Having both in one software will make it easier (and less expensive) for you to view financial information related to costs of materials, sales numbers over time, returns, product losses, and more.

6. Purchase Ordering

Many businesses rely on purchases from other vendors such as wholesalers or raw material providers to sell their own products. A good inventory management system makes it easy to manage different vendors, build purchase orders using customizable templates, and even automatically send purchase orders when stock is low.

7. Inventory Tracking

You and your customers want the most up-to-date information on where products are and how long they can expect to wait for delivery. A good inventory management system will allow you to generate inventory tracking codes, which you can send with customers’ receipts so they can track their packages for themselves.

For restaurant and cafe owners, food inventory tracking is a key part of restaurant inventory management. With proper perishable inventory management, you can cut costs and reduce waste.

8. Inventory Alerts & Forecasting

Many inventory management systems will send you daily stock alerts and automated low stock alerts, and can automatically generate a new purchase order when an item is below a certain stock threshold. Some systems will automatically update online product catalogs to list items as low in stock or unavailable.

Over time, your inventory management system should be able to analyze your sales activity to tell you when to expect an influx of orders and whether your business has a “slow season.” With this information, you can keep the right stock levels and avoid any cash flow issues all year long.

9. POS Capabilities

If you sell items in a store, you’ll need a point of sale (POS) system to check out customers. With an all-in-one inventory management and POS solution, whenever you sell an item in-store or at an event, your inventory (and your eCommerce website, if you have one) will update. You can also allow your customers to purchase items that you don’t have on hand, with the option for pickup and delivery.

Ideally, your POS system is mobile-friendly, so you can sell at pop-up shops, trade shows, special events, markets, etc. Read our article on the best mobile POS systems for a variety of business types to grow on the go.

10. Third-Party Integrations

Successful businesses rarely get by without using several different tools for things like managing an online and offline presence, paying employees, taking inventory, and offering customer service.

A good inventory management system will integrate well with an eCommerce platform, accounting software, payroll systems, payment processors, shipping management tools, and anything else you need to efficiently run your business.

Choose Inventory Management Software If…

Not every business will require specific inventory management software. Smaller businesses might get by with the old pen-and-paper approach, or with a simple spreadsheet.

However, you should get inventory management software if:

• Your business sells more than a few products or sells products with several variations.
• Returns are more common in your industry (clothing, health and beauty, etc.)
• You own a restaurant or cafe, run a catering company or meal subscription business, or work with perishable food in any capacity.
• More than a few people pick, pack, and ship items.
• You ship from multiple locations.
• You sell on multiple sales channels, such as your own website, an online marketplace, social media, and/or physical storefront.
• You have multiple physical locations or sell at offsite events like trade shows, markets, and pop-up shops.
• Your current inventory counts are not matching up.
• It’s too difficult or time-consuming for you to maintain inventory records on your own (sometimes the price of convenience is really worth it.)

Next Steps To Find The Right Inventory Management System

Most inventory management systems are tailored to specific industries and business sizes.

If you own a restaurant, cafe, food truck, bar, or sell food in any capacity, read up on our best restaurant inventory management software. The faster you start closely monitoring your inventory, the less you’ll end up with food spoilage and revenue losses.

If you’re in retail, sell online and offline, or just need a flexible inventory management system, read our post on the top inventory management systems to find software that meets all your needs.