Smart Inventory Planning Is Critical to Small Business Success

Businesses need smart inventory planning to maximize cash flow and meet customer demand.

Smart inventory planning is essential in order to properly manage a business's cash flow and maximize its profits.

If you carry too much inventory, you'll tie up cash that could be better used elsewhere, incurring the expense of tracking and storing the items and running the risk of investing in inventory that won't sell. If, on the other hand, you have too little inventory, you might not be able to fulfill customer orders in a timely manner, which can mean losing future — as well as current — sales.

By properly managing your inventory, you'll be able to improve your cash flow while still meeting customer demand for quick order fulfillment. According to TLC Group, successful inventory planning depends on a combination of proper categorization, on-demand forecasting and automation.

Proper Categorization

First, you need to find out what items sell more quickly than others, so you'll have optimal amounts of each product. Chartered Global Management Accountant recommends using the ABC inventory management system, which is based on the Pareto principle (also known as the 80-20 rule) where 80 percent of sales comes from 20 percent of items. "A" items are the fastest sellers, "B" products are the intermediate sellers and "C" are the slow-moving items that still are worth carrying. You may also find that you have "D" items that should be liquidated/discontinued.

You can look at historical sales as a guideline for this categorization, but beware of changing customer tastes and the accuracy of any historical information. The hot-selling item a year ago may no longer be popular, and your inventory needs should always reflect current customer tastes. Scotiabank recommends reviewing inventory periodically to determine whether the trends have shifted, and then adding or reducing items as necessary.

On-Demand Forecasting

Be aware of certain times of year when specific items move faster. School supplies, holiday-related items and other goods have demand that fluctuates by season. Be ready to meet these seasonal shifts so you can minimize the time that inventory sits on your shelves and ties up your capital. You don't want to carry back-to-school supplies in May — but you also don't want to wait to stock the items until September, when most customers have already purchased what they need. Evaluate historical sales and changes in consumer tastes by looking at your own sales and industry figures both over the long-term and short-term. Examining how sales in your industry have fluctuated in the past will help you figure out when you'll need more of a certain product to meet seasonal demand moving forward.

Automation

Having an automation system to manage inventory is a best practice for businesses of all sizes. But whereas large companies use complex inventory systems that integrate with accounting, customer relationship management and other enterprise business systems, most small businesses don't have the need or means for such large systems. There are several vendors that offer relatively simple but efficient (and cost-effective) inventory systems designed for smaller firms.

However, an inventory system that works well for one small products firm may not work well for another. To determine the best inventory management system for your business, research online ratings and consult with local experts at the municipal chamber of commerce, local small business development centers (operated by the U.S. Small Business Administration) and the local chapter of the Service Corps of Retired Executives (SCORE) to see what might be the best fit for your firm.