4 Small Business Inventory Management Challenges

A female employee leans on a wooden table outside as she writes down business inventory and stock in a notebook.

Inventory management is one of the biggest challenges small business owners face. Time-crunched, overworked and juggling multiple tasks, entrepreneurs often find it’s easy to drop the ball when it comes to keeping tabs on inventory.

But that can spell trouble for the bottom line. Poor inventory management can be one of the reasons your profits are shrinking rather than expanding.

Most business owners strive to have just the right amount of products to meet demand. When done right, you’re able to lower the costs associated with carrying extra inventory and avoid situations where you have to re-direct funds to acquire more of it. Inventory management can also prevent waste for businesses with products that can eventually become too old to sell.

Mistakes in inventory management are common, but they're by no means insurmountable. Take a look at these four costly inventory mistakes and how to overcome them in your business.

1. Failing to Properly Forecast Inventory

Inventory management isn’t as easy as producing a set amount of products and quickly moving them off the warehouse shelves. Demand ebbs and flows. Caught off-guard either way, and it could mean money going down the drain. Incorrect forecasting can lead to cash flow shortages if money is tied up in inventory or you have to use funds earmarked for daily operations to pay for extra inventory. It also prevents you from pursuing growth opportunities if all your money is tied up in inventory.

The Fix: Fine-tune Your Forecasting. It’s impossible to project with 100% accuracy the amount of inventory you'll need in a year, but you can come close to it through optimized forecasting. Inventory forecasting should be based on real data, including historical sales figures, current and future market trends, and the health of the economy. Your marketing plans also have to be taken into consideration: if you have a big advertising campaign on the horizon, you'll need to ensure you have enough product to meet the increased demand that will hopefully result.

Details also matter when fine-tuning your inventory forecast. Calculate your monthly average sales to make realistic projections. Then, you’ll be able to set a more accurate Periodic Automatic Replenishment, or PAR, level. Once inventory falls below the PAR level, you’ll know it's time to order more.

2. Manually Tracking Inventory

Time is a finite resource for small business owners and a common time-waster is relying on spreadsheets to manage inventory or, worse, jotting it down on paper. Plus, relying on a manual process costs money and can lead to mistakes.

The Fix: Automate Inventory Management. By automating this process, businesses can reduce human error and speed up the time spent tracking orders. There are several cloud-based inventory management solutions available to small businesses to help with inventory-related tasks.

These programs connect with point-of-sale systems, enabling you to track stock accurately as orders come in. Some of these programs also offer payment tracking, alerting you in real-time when transactions are pending and completed. They take the guesswork out of inventory and make ordering automatic.

When choosing a software program, consider one that tracks inventory in real-time, helps forecast demand, prevents shortages and enables easy analysis.

3. Lacking Accountability for Inventory

Sometimes, overstretched small business owners delegate tasks to whoever is conveniently available. But that can be devastating to inventory management. If there isn’t a specific person tasked with controlling inventory, it can lead to over-ordering and under-ordering, which has a direct impact on the bottom line. And without dedicated staff, there's no one to hold accountable if inventory mistakes occur.

The Fix: Hire a Stock Manager. Hiring a dedicated employee or team of workers to be responsible for inventory management will cut down the likelihood of ordering mistakes. You can conduct inventory checks on a regular basis, quickly identify the product that's getting older, and provide accurate information that can help when forecasting. When hiring or delegating an inventory manager, look for someone who is organized, has strong data analysis and forecasting skills, and can communicate well.

4. Failing to Track Performance

Once you create a system for inventory management, it's critical to track its performance on an ongoing basis. Otherwise, you won't be able to identify areas where you can optimize for the future. Businesses who fail to run periodic checks won't see there’s a problem until it's too late. And that can lead to rising costs, cash flow shortages and angry customers.

The Fix: Assess How It's Working. Small business owners should start by analyzing turnover, days to sell and holding costs. Those factors will indicate whether their current inventory management system is working. For example, if your holding costs are increasing, you'll know it's because you're sitting on older inventory and it's time to make adjustments.

Inventory management mistakes are common among small business owners, hurting their ability to grow and increase profitability. But there are simple solutions to ensure that doesn't happen. Applying strategies to tackle common inventory management snafus can go a long way in improving operations and your bottom line.

The views expressed by the author are not necessarily those of Fifth Third Bank, National Association, and are solely the opinions of the author. This article is for informational purposes only. It does not constitute the rendering of legal, accounting, or other professional services by Fifth Third Bank, National Association or any of their subsidiaries or affiliates, and are provided without any warranty whatsoever. Deposit and credit products provided by Fifth Third Bank, National Association, Member FDIC.