Organized Bookkeeping

Leveling up your Inventory System

When businesses first start out, it’s common for them to have a lazy inventory system.  If the shelf is empty, we must be out of inventory.  That might work for slow businesses where you have ample time to reorder inventory and have it delivered.  However, the perils of being short on product when customers order will soon drive any business manager to look for a better solution.  Especially in e-commerce where most customers expect immediate and timely shipping.

So… the first thing is….. do you rely upon your e-commerce solution to manage your inventory?  That is usually the first step newbies take.  However, usually it’s not robust enough for large inventory turnover rates.  There is sometimes a large gap between what the app calculates and what is actually in your warehouse.  It’s not the app’s fault, it’s just that someone forgot to record the returns, perhaps the product wasn’t delivered on time, or the wrong color arrived.

(If you order in bulk, the manufacturer might send you an assortment of products; not specifically what you ordered.  This is normal business practice in some industry segments, fyi.)

Relying on the inventory app included with your e-commerce site usually takes a few months before you start knashing your teeth.  Was the inventory app’s fault?  Or perhaps something else is to blame?

Before adding any large inventory system or any other system for that matter, you need to do a few things to smooth out the process.  Adding the wrong process can spend thousands of dollars in labor, materials and money.  Go back to the beginning and measure twice and cut once.

One:  Determine your overall goal.  Do a needs assessment with everyone in your staff.  What do they want from the inventory system?  Some common tick marks are:  cloud access, easy data entry, bar coding,  package tracking, purchase orders, sales orders, and inventory needs projections.  Write down all the brain storming ideas.  Look at it.  Think about it.  Notice the themes.  Come up with the must have’s.  Have a follow up meeting to discuss the results.  Rehash everything.  Vote on the results, with you being the deciding vote.  (Why include your staff?  Remember that inventory touches every part of your business.  Perhaps an easy sales process will result in twice as much bookkeeping.  Balance the needs of every department when choosing an inventory system.)

Two:  Checkbox lists.  Make a list of your must haves.  Evaluate every software option that is available with in your budget.  Compare each program with your check list.  This might be where you might engage an inventory expert to help you out.

Three:  Order test products from the top three options that most met your needs.   Have the people who will be managing the inventory help you with testing.  Have those people report back to you what the pros/cons are of each system.

An example is the standard QB inventory might not be able to support the number of inventory items. QB Enterprise has a larger capacity and syncs with the rest of the accounting system.  However, QB has a flaw that only one person can be entering the inventory items.  Perhaps you need three or four people to be in that system at that time.

Four:  Is your inventory ready to be in an inventory system?

Each inventory system has the same requirements:  Unique inventory items or SKU’s for each product.  This means a package of 10 will have a different SKU than a package of 5.  This goes for colors as well.  This is also necessary for bar coding.

Do you have an accurate warehousing system?  If someone orders a product, do you know where that product is?  Inventory Bins are fantastic things that are sometimes overlooked when growing a business.  Each warehouse location is assigned a code.  When the inventory is stocked; it’s also recorded to that location.  When the order is processed; a pick list is printed and then you go to that location to get the inventory.

Do you have a system for accurately recording deliveries/returns/shipments?  If you do not track this in real time; you will have tons of ghost inventory.  In fact, if you don’t have this in place don’t spend money on the software.  Get on top of your paperwork.  This might solve your inventory problems. 🙂

(I know that someone is muttering; I need the freaken system so that I can be on top of the paperwork, you are making no sense.  The most common thing that I see with broken inventory systems are accounting software programs that have not had information entered in months or even years.  There is no magic accounting fairy that can fix your inventory system if your accounting software is not up to date.)

Do you know when and where you purchase your inventory?  

An example is an artist who buys flea market finds and refurbishes them for sale.  Chances are they may not know exactly where and when they buy all their finds.  They might not use them for years until they are inspired to rework them.  That is the most challenging scenario.  A possible solution is to order inventory tags and record the purchase date/price on the tag.   Affix or tie the inventory tag to the unique product.

The other scenario is when the business doesn’t do their books in a timely fashion.  They don’t record purchase orders and instead put everything to Cost of Goods Sold.  Save time and money on hiring an inventory expert.  Get this process under control.

Do you know when you sell your inventory?  I know this might be silly, but say you are selling tshirts at a fair.  Are you recording which and what tshirts are selling?  Or are you marking everything as ‘sales’ one line item on your accounting software?  If you do not record this information; you will not be able to record demand, price sold, or to do projections. A solution is attaching sales tags to each shirt.  When sold, pull off the tag.  Counting the Tshirts before and after the market will also show if someone stole the tshirts.  ie.  Prior Count less sold = remaining tshirts.  Any unaccounted amount would be stolen/lost.

Five:  Determine which software is best for your needs.

Six:  Make a plan to implement the software.  Does it require hours of data entry?  Howabout staff training?  Does it allow for data uploads?  How does it interact with your accounting software? (Hint:  double entering information into QB & your inventory system is not going to popular with your staff.)

Seven:  Implement, determine weak spots, improve, and then finally relax.  Give your staff time to learn the system. Patience is a virtue.  This is where true managers shine.

So now you are thinking; Wow.  Wow.  Wow.  That’s a lot of work!  Yes.  Yes. Yes.  This is what successful businesses do if they sell, purchase and ship a lot of inventory.  There is no bucket called ‘other’ in the accounting system.  There is no pile of unentered paperwork.  Warehouses are clearly marked and each transaction is recorded in a timely manner.

I think most people intuitively know this; however; it can be a major buzzkill of ‘not fun things to do.’ It’s like doing a bang up job on a payroll system; it’s painful but it helps modernize, profitize, and organize the business.  Once the business has a better handle on the inventory system; it’s more likely to grow, become more profitable, and operate more efficiently.

And you are fooling yourself if you don’t think Amazon, Starbucks, and JC Penneys don’t know exactly what they have, what they have ordered, and what they have shipped out.  It is possible.

Blog is inspired by a question on facebook.  Everyone was talking about the available inventory software.  Sometimes it’s not the software that’s the problem.  LD.