One of the keys to success for any retailer, regardless of the size of the business, is inventory control, however it is something small retailers often overlook. One automotive shop, which stocked its own parts, found that they were letting $600 a month in inventory leave the shop, without any charges to customers. And, that was just bolts, not including nuts, washers, gaskets, hose clamps, and many other small items that the mechanic took for granted. Most small to medium businesses can’t stay in business with that kind of loss. In addition, tax laws require that most retailers complete an inventory at the beginning and at the end of each tax year. With that in mind, here are some inventory control and management tips for the single-owner business.
What to Inventory
According to the IRS, the items in your store that must be inventoried are raw materials, finished products, and works in progress.
Determining Value of Your Inventory
You have two ways to assign value to your inventory: cost, and lower of cost, otherwise known as the market method.
The cost method of valuing your inventory takes into consideration the cost of ordering, shipping, and stocking the items, as well as the cost of the item.
With the Lower of Cost Method, you choose the lower amount of value for the item after comparing its value at the time of inventory to the price you paid for it initially.
Inventory that does not fit into these categories must be inventoried using LIFO or FIFO methods.
The Uniform Capitalization Rules affect manufacturing and resale activities. You must capitalize all direct costs and an allocable part of most indirect costs you incur from your production or resale activities.
Basic Elements of a Retail Inventory System
Each business’s inventory system has unique needs and requirements. There are some elements that are important to include in any inventory management system, regardless of the size of the retail store: purchasing, inventory management, warehousing, sales orders, and outbound logistics, including order fulfillment, packing, shipping, delivery, and customer service management.
Tips for Inventory Location
Often, small business owners, especially single-owner/operated stores, have rather lackadaisical inventorying techniques. This may work for some businesses. An ancient record shop (LPs, or vinyl recordings) in Big Spring, TX, run by two octogenarians, had records piled up and filed on three different floors. But, if you wanted something, one of them would have to lead you through the meandering aisles, taking you to your selection.
This type of inventorying, however, overlooks crucial business-related matters. Those thousands of records, some 30 years old, still had the original price tags on them. A 45 RPM record of Elvis Presley’s “Love Me Tender” was marked – and sold – at 5 cents.
Chances are that your business needs a savvier inventory method. Here are some ideas for your inventory location:
- If you place an item somewhere, label that place. Even if it is the bookcase behind your desk.
- Give each shelf, cubby, or spot on the floor in the storage room a name. “Floor Space A” or “Shelf 1B” are examples of clear, meaningful location names.
- Employees should be able to read location labels from a distance.
- Include arrows on the location labels.
- For large inventory rooms, be more specific with your locations
Item Control
For item control, you need to think about each individual item in your store. It should have a description and an item number. If there are units of measurement involved, that should also be part of the item number or description.
Most retailers have their own shorthand version for certain categories of inventory. Whatever the description is, it should leave no doubt as to which item is in stock. This cuts down on confusion and ordering mistakes.
The item numbers should be short and easy to read. One of the temptations for small business owners is to use the item description as the item number. These descriptions can run into hundreds of figures while your item numbers should be around six figures or less.
For items that are sold in units of measurement, such as “bags” or “pcs,” you can add those units to the end of your item number. Consistency is key to making it easier to reorder.
Starting Count
Start your new inventory system off with an accurate starting count. Don’t try this until you have the locations labeled, the descriptions written, and the item numbers assigned. You should also develop your system of measurement so that there are no surprises.
Once all of this is done, start your actual inventory. This is the point at which a good software system can be invaluable. Once the inventory is entered, it will be automatically adjusted as the items enter or leave your store. Some of the systems will even produce item number labels for your items, along with a barcode that can be read by your POS.
Employee Training
Single-owner retail stores are often owner-operated. If you have employees, be sure that they are trained in how to receive and stock new inventory. The POS should take care of outgoing inventory unless you are using an ECR only.
Even if you are using an automated POS that keeps track of inventory, everything can still get messed up if you don’t train your employees. Make sure they know who is supposed to do what in the store, and how it should be done.