Follow These Retail Inventory Management Best Practices To Boost Cash Flow

Inventory is typically one of retailers’ highest operating expenses.

Yet, for many business owners, their stock is a bit of a mystery — reorders are set up on a gut feeling or by walking the aisles. Those methods might’ve worked before, but with rising costs and even higher customer expectations, poorly managed inventory can put the future of your small business at risk.

If you want to stay in business for years to come, mastering your inventory should be your highest priority. In this article, we’ll share our top 12 inventory management best practices for saving time and increasing cash flow, along with tips for evaluating inventory management software.

Here are the most important actions your business can take today to tackle your inventory challenges.

1. Avoid Manual Stock Tracking

The first and most important step in taking control of your inventory is to stop tracking it by hand. If you’re using a spreadsheet or a notebook to reconcile your stock counts, you:

1. Probably waste time doing it.
2. Likely make errors without realizing it.
3. Lack a quick way to monitor stock levels, wholesale costs, and other key metrics.

In short, manually tracking inventory is a lot like flying blind (and comes with similar risks).

First, you need to digitize and track it in inventory management software. If your business runs on an old cash register, this might sound daunting — but rest assured, you won’t need special training or a dedicated IT team to implement it.

Most point of sale (POS) systems include a basic form of inventory tracking software. Having a real-time view of your stock levels not only saves you time, but lays the foundation for every other best practice on this list.

2. Base Reorders on Sales Data

The golden rule in inventory management is to keep just enough product on hand to meet demand. In other words, you need to have what customers want at the right time without overordering and tying up your cash flow in dead stock.

The best way to do this is to use your sales data. Instead of simply putting in a standard repeating order with your suppliers, use your previous week’s sales data to base them on what’s actually selling. Some inventory management software can suggest reorder amounts automatically based on sales volume.

3. Follow the 80/20 Inventory Rule

The 80/20 rule in inventory management states that roughly 80% of your business’ profit comes from 20% of your stock. The numbers may vary, but the takeaway is simple: Focusing on your bestsellers and high-value items helps you manage inventory better and maximize shelf space.

An important aspect of the 80/20 rule is defining what a “high-value item” means to your business, as it varies wildly by industry.

For example, a liquor store that does the bulk of its monthly sales on midrange bottles and six packs will monitor inventory very differently than a clothing store that counts on earning similar revenue by selling a small number of expensive cashmere sweaters.

Some businesses, especially those that sell luxury or expensive items, like to run what’s called an “ABC stock analysis,” which involves looking at sales data to classify your stock into three categories.

ABC Analysis Basics

4. Look Regularly at Category Sales

When we say, “Use your sales data,” we don’t mean, “Look at your daily sales report and call it a day.” Checking your overall sales is a helpful metric, but it doesn’t give you a deeper understanding of your inventory.

Defining categories for your stock helps you:

• See profit margins by category.
• Identify product categories that are most popular with customers.
• Understand inventory turnover for different parts of the store.
• More easily find dead stock, along with items that should be discounted or phased out.

Most importantly, occasionally looking at category sales helps you determine where to invest more. Many times, items with the biggest brand recognition or products you think are popular don’t move as quickly as you think.

Category reports give you an honest view of product performance and customer preferences in a way that overall sales numbers and your instincts alone don’t.

How To Use Category Sales: Two Examples

5. Do Regular Inventory Counts

Even if you digitize your inventory and have what feels like a perfect system, regularly counting your shelves is a must. Of course, manually counting every item in your store on a daily or weekly basis is impossible.

Instead, find an inventory counting method that makes sense for your store.

Here are some tips:

• Run cycle counts. Instead of counting your entire stock, count a fraction of it more regularly to spot any inconsistencies. You can do a random selection, rotate product categories, or prioritize your high-value items.
• Prioritize perishables. If you work in grocery or another industry with perishable items, make sure to prioritize checking on soon-to-expire items to avoid spoilage.
• Use mobile scanners. Instead of walking around with a clipboard and a printed stock list, use a mobile inventory scanner (or app on your smartphone) to scan UPCs, check the amount in inventory, and count from there.
• Perform a full audit periodically. It’s still important to do a comprehensive count every so often to make sure the situation in the back office matches the reality on the floor.
• Look for department-level irregularities. While some amount of shrink is inevitable, keep an eye out for certain departments or product categories that consistently have issues. It might be due to inconsistent receiving processes or theft.

Doing regular inventory counts is vital for catching input errors, stopping theft, and preventing unneeded orders.

6. Use Demand Forecasting

As any store owner knows, you can’t just put in the same purchase order every week and hope for the best. Demand changes throughout the year. Stocking blindly for the season ahead can leave you overstocked with last year’s trending items and short on what customers are buying now.

Without forecasting, seasonal swings and sudden trends can result in unsold products or empty shelves.

The longer you use an inventory management system, the easier it is to prepare for predictable demand spikes. Demand forecasting lets you look at your historical sales data to plan ahead, seeing which items flew off the shelves during similar periods. You can also compare that to your recent sales to identify sales trends.

Demand forecasting isn’t just useful for tracking seasonal demand, either. You can also look at how sales change based on times of the month or days of the week, during certain types of weather, or in relation to certain sales or promotional events.

7. Use FIFO for Perishable Inventory

Grocery stores, convenience stores, delis, and other businesses that sell perishable items have special concerns when it comes to inventory management. The most important is avoiding spoilage.

One of the most effective ways to do this is to use the first in, first out (FIFO) stocking method. With FIFO, your staff puts the oldest items to the front and sells them before replenishing with newer stock. This ensures the items closest to expiring are front and center for customers.

When restocking any perishable items, the oldest items should be moved to the front of the shelf.

8. Account for Supplier Lead Times

Setting reorder points based on stock levels is important, but it’s equally important to set par levels based on who is supplying it. A POS system lets you tie products to a vendor (or multiple vendors). This also lets you look at a supplier’s average time to delivery.

Accounting for supplier lead times helps you further dial in the correct reorder point. For example, if a convenience store owner typically sells a lot of cold drinks on holiday weekends, and their distributor has a four-day delivery window, they’ll want to put in that reorder early in the week to avoid a stockout.

9. Set Up a Consistent Receiving Process

Inconsistent receiving practices create gaps between what’s on the shelf and what’s in your system. Without a straightforward step-by-step process, staff might forget to scan items, overlook notes, or miscount boxes. This wastes time and leads to misplaced or uncounted items.

First, make sure you have a clear schedule for when your deliveries are due. This lets you pull up purchase orders on your POS system before the shipment arrives. Second, train employees on how to receive inventory, what to do if anything is missing or broken, and who should handle final approval.

Last, when entering new items into the system, make sure there’s a consistent and documented process for doing so. Even an efficient receiving process can be derailed if products are labeled differently by different employees.

10. Assign SKUs to Every Product

Inventory management systems only work if every product you sell is accounted for. This includes items you make in house, custom bundles, or any other nonstandard product you sell.

Assigning a SKU to every product gives you a holistic and detailed view of your sales, instead of lumping your nonstandard inventory into one chunk. Categorizing and tagging everything in your product catalog helps you understand costs and profit margins, and allows you to track items that don’t have a standard UPC.

11. Integrate Payments With Your POS System

The best part of modern inventory management systems is that they eliminate a ton of data entry — but automated inventory management is out of reach unless your payments and inventory are processing on the same system.

Without integrated payments, you still need to reconcile inventory levels against sales at the end of the day. Using a POS system that includes payment processing is necessary for updating stock levels and seeing how inventory turnover correlates to profits.

H2: 12. Connect Your Online and In-Store Inventory

Omnichannel sales are a fantastic way to bring in more sales and meet the expectations of hybrid shoppers — people who like shopping both in person and online. But setting up a separate e-commerce website and hoping for the best is a recipe for disaster.

Instead, integrate your inventory management and e-commerce systems to sync your in-store and online inventory. This way, your stock levels, product descriptions, and pricing are accurate no matter where people shop.

If you have a larger-scale e-commerce business, you also want an inventory management system that generates pick lists, points to item bins, and schedules fulfillment.

What Are the 5 Steps of Inventory Management?

Generally speaking, inventory management has five major steps. Here’s what they are and how the inventory best practices we detailed above fit in.

Step 1: Forecast Demand

Knowing what our customers want (and when they want it) is essential for meeting customer demand and boosting profits. This includes merchandise planning and reviewing historical sales data.

Key aspects to remember:

• Factor historical sales data and category sales data into your purchasing decisions.
• Set low-stock thresholds and set up smart reordering.
• Review sales from holidays and peak seasons to find consistent patterns.
  
  

Step 2: Reorder Stock and Manage Vendors

Once you’ve identified what needs to be ordered, it’s time to generate purchase orders and update your inventory.

Key aspects to remember:

• Use retail inventory software with vendor management so you can track wholesale costs and set up POs directly from your back office.
• Use prebuilt vendor catalogs to quickly set up new items in your system with accurate product descriptions and suggested pricing.
• Account for supplier lead times when setting up reorders to make sure new stock doesn’t arrive too early or too late.

Step 3: Receive Shipments and Update Inventory

To keep customers happy, you need to know both how much stock you have on hand, which requires the right systems and consistent processes.

Key aspects to remember:

• Set up a consistent process for receiving new shipments and entering inventory into your POS system.
• Track all purchase orders in your POS software so you can receive against an invoice.
• Set up departments and/or product categories to get a more detailed picture of inventory turnover.

Step 4: Track Stock Levels and Maintain Quality

After stocking your shelves, you need to ensure stock levels are accurate, prevent spoilage, and keep track of items that are running low.

Key aspects to remember:

• Use inventory management software to track your stock levels in real time.
• Use FIFO for perishable inventory and track short-dated inventory so you know when to put items on sale.
• Set up purchase orders based on sales volume and your preset low order levels.
• Keep an eye out for dead stock to avoid unnecessary reordering and to phase out or discount unpopular items.
• Perform periodic cycle counts to make sure there are no major discrepancies between your floor and your back office.

Step 5: Makes Sales and Update Inventory

Inventory management is a cycle, but your day-to-day sales should be part of the process. Find ways to avoid manual reconciliation.

Key aspects to remember:

• Use integrated payment processing on your POS to track sales in real time and reduce the need for manual stock reconciliation.
• Integrate your POS and e-commerce systems to sync your in-store and online inventory.
• Set low order thresholds to spot any unexpected spikes in demand.
• Track category sales to understand your customer’s preferences and spot trends.

What’s the Best Inventory Management Software?

Inventory management software is a must for improving your stock tracking and boosting cash flow — but which system is right for you?

The answer depends. When looking at inventory management software, ask yourself these questions:

Find the Right Inventory Management System for Your Business

Following these 12 inventory management best practices goes a long way toward helping your small business improve profit margins and make better purchasing decisions.

But every POS system has its strengths and weaknesses — and many generic POS systems promise the moon only to fall short.

At POS Nation, we match small, specialty retailers with the industry-specific tools they need to succeed. Talk to one of our experts today to find the right inventory management system for your business.