Can you imagine taking a $10,000 order on carbon paper? What about storing it in a file cabinet when you got home from making the sale at a retail trade show?
In 1985, this practice would have been unremarkable, yet it still happens in the 21st century in spite of technological progress. When it comes to inventory, many small business owners are self-taught and what works well enough when they’re starting out is often what they’re doing twenty years later.
By selling through Storenvy, you’re already steps ahead of sellers committed to outdated retail practices. However, many sellers with a polished digital storefront can still settle for “good enough when it comes to inventory in the back room. “Good enough” can work for a time, but it can take a turn down a bumpy road.
To save you headaches and smooth that road, let’s take a moment to give you a good starting point for developing an inventory management process that adapts as you grow.
What is inventory management?
The textbook definition of inventory management is tracking the size and scope of your product. Entire college courses are devoted to the subject, which examines the planning, analysis, and control of your inventory and its movement.
Daily decisions depend on specific details about the quantity and location of your product, which is why good inventory management practices are so important. With a good system in place, you will have up to date information about your inventory so you can quickly answer questions like:
- What should I order?
- How much should I order?
- When should I order more?
- Do I have too much inventory?
- Should I sell off excess inventory?
- Are my prices too low?
How you manage inventory records will have a big impact on how quickly and accurately you can make these decisions. Let’s look at several approaches to recording inventory.
Ways to record inventory
Pen and Paper:
Barely a generation ago, paper systems were standard and some people are just more comfortable using a pen than a keyboard. However, limitations will quickly outweigh the benefits.
Some sellers may start out with sales recorded in a notebook, but will quickly outgrow it. Information on paper can’t be quickly calculated, sorted, or edited. Additionally, it can be easily lost or destroyed.
A digital spreadsheet offers clean rows and columns to organize and sort inventory records. Microsoft Office’s Excel and Google Docs’ Spreadsheet are two common spreadsheet programs you may be familiar with.
Spreadsheets have many strengths over paper. They offer all the automation of sorting, editing and calculating that computers offer. Plus, they’re extremely customizable. The sky’s the limit in how you label rows and columns.
Spreadsheets offer a lot of power when it comes to crunching numbers, but the learning how to take advantage of this power is a challenge when you aren’t mathematically minded. Also, spreadsheets’ features aren’t tailored to inventory management specifically.
Inventory Management Software:
One of the biggest advantages of inventory management software over spreadsheets is a set of features developed specifically for the process of ordering, holding, and selling inventory. This includes features like easy product entry, automated line sheets, reports, and automated invoices. Web-based inventory management software goes a step further, offering easy access from any computer with an Internet connection.
If you sell on Storenvy as well as other channels, such as Etsy, directly to retailers, or at trunk shows, look for inventory management software, such as our partner Stitch Labs, that will integrate with all of the places you sell, so you can manage all sales and inventory in one place.
Key Terms for Inventory Management
Many accounting terms show up in inventory management. It’s easy to glaze over. However, there are several big ones you should work to understand.
COGS – This acronym stands for Cost of Goods Sold and you’ll see it a lot at the end of year and during tax season. COGS is the amount an unit of inventory costs you to put it on your shelf before it’s sold.
This amount includes the cost of the materials used in creating the good along with the direct labor costs used to produce the good. It excludes indirect expenses such as distribution costs and sales force costs. It’s important to note that this cost is only counted after the product is sold.
In general, COGS tells you what you’re spending to get your inventory into a sellable state. COGS is also used for reporting taxes and calculating other inventory metrics, like turnover.
Turnover – Inventory turnover is the rate at which you sell your average inventory on hand during a given period.
Calculate inventory turnover by dividing COGS by the average amount of inventory on hand for a specific period of time. For example, suppose you sell $4000 worth of leather clutches in a three-month period and you keep $2000 worth in your inventory on average during those three months. This would make your inventory turnover 2 since your inventory turned over twice in the three-month time period.
Good turnover rates vary by industry, but a high turnover could mean surprise sales or indicate you are underpricing your products. Low turnover rates could mean you’re overstocking or holding onto products that aren’t selling.
Available vs. Committed Stock – Available stock is what it sounds like, stock that is still up for sale. Committed stock is stock that may still be on your shelf, but has already been sold.
Keeping track of available and committed stock will help you avoid being oversold. For example, you have 10 iphone cases on your shelf and someone places an order for two of them. Your available stock is now 8, while your committed stock is now 2.
This is an extremely brief introduction into a very large world of inventory management, but if this has whetted your appetite for more, let me offer additional direction:
- Don’t relegate inventory to an end of year product count. Practices that keep the current state of your inventory clear will help make choices about your inventory clear.
- Take time to examine your inventory management method and explore the best option for you. I’m biased, but I believe you’ll see great returns in efficiency and time for good decision making if you invest in good tools.
- Learn the technical side of inventory management, but don’t hesitate to consult with a good accountant when things get tricky. She will be able to identify problems that are costing you money and help you make decisions that can lessen your tax burden.
- Finally, please don’t take a $10,000 order down on a scrap of paper, even if it’s carbon paper.
Check out our partner, Stitch Labs
Check out Stitch Labs, providers of simple inventory management, who help Storenvy sellers automatically manage their inventory and sales. Plus, Stitch provides awesome analytics to show you how your business is performing, and easily identify key insights to make smart decisions about how to grow your business. Let Stitch help manage your inventory and sales and save you time.
As a savvy Storenvy store owner, get an exclusive, extended FREE trial. Experience Stitch’s powerful inventory management without limits for 21 days.