GUIDE

Mastering Retail Inventory Management: A Detailed Guide for Small Business Owners

Is inventory management really that important to your small business?

Let’s look at a few statistics:

43 percent of small businesses do not monitor their inventory
Inventory accuracy in U.S. retail operations is 63 percent
34 percent of businesses struggle with unavailable products, leading to delayed shipments

Almost half of small businesses don’t have a handle on inventory. Of those that do, 37 percent don’t accurately control it. Do any of these issues ring true for you? What if we told you that by addressing these struggles, you could reduce inventory costs by ten percent? What could you do with that extra capital?

Managing retail inventory is essential to a successful business. Without good practices, you’re flying blind. But, as a small business ourselves, we understand the challenges you face:

Limited resources and smaller budgets compared to big-box retailers
Less buying power and capacity to stock extra inventory
Poor forecasting assumptions leading to over or understocking
Outdated or manual inventory processes

These challenges make managing inventory overwhelming. But the good news is, modern technology can level the playing field! Affordable cloud-based inventory tools now give small retailers the visibility, automation, and insights they need to optimize inventory.

This guide will provide you with the knowledge and tools to take control of your retail inventory. We'll cover everything from the basics of inventory management to the best practices to help you minimize costs, avoid stockouts, and maximize profits.

Chapter 1

What Is Retail Inventory Management?

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Inventory management is the process of ordering, tracking, and controlling your product inventory. Inventory is the lifeblood of your retail business — and finding the right balance is critical.

The trick is having enough stock to meet customer demand without overstocking. A product surplus will tie up cash in excess inventory and risk losses from damage or declining value. With too little product, you’ll upset customers and lose sales.

Where do you start? Setting goals is an excellent place to begin if you lack control over your inventory.

Avoid stockouts and shortages > Stock enough inventory to fulfill demand.

Reduce carrying costs > Don’t overstock and tie up cash.

Optimize inventory turnover > Sell products profitably and efficiently.

Minimize write-offs > Reduce errors, theft, and damages.

Forecast accurately > Rely on trends and data to make purchasing decisions.

While setting goals is essential, knowing why you’re setting those goals is just as important. Without clear and achievable outcomes, you’ll waste time and resources. Which outcomes are you trying to avoid?

Lost sales and customers due to stockouts and extended delivery times
Excess carrying costs and lack of space due to overstocking
Losses from obsolete stock
Increased labor costs and frustrated staff due to manual inventory processes

When you know what you’re trying to avoid, you can set better inventory tracking goals. For example, a clear and achievable goal might be, “I want to reduce carrying costs by five percent between January and March.”

Setting and tracking your goals is impossible without accurate inventory records. With visibility into what products you have on hand in real time, you can make sure you don’t sell products that aren’t available. Key aspects of accurate inventory tracking include:

Forecasting demand based on sales history
Factoring in lead times for reorders
Setting reorder points and safety stock levels
Tracking turnover rates

We’ll explore these components in detail throughout this guide. With the right retail inventory management strategies, you can avoid losing sales, prevent excess carrying costs, and free up capital to reinvest in your business.

Chapter 2

Types of Retail Inventory

You might manage a few types of inventory when handling and controlling your stock. Visibility at every stage is crucial to effective inventory management.

#1: Raw Materials

Raw materials are the components or materials that you use to manufacture products in-house. If you make custom or specialized products, you’ll need enough raw materials on hand for production to run smoothly.

For example, a furniture maker needs lumber, hardware, and fabric in inventory to manufacture sofas to meet orders.

#2: Work-in-Progress (WIP)

WIP refers to products you’re currently assembling or manufacturing. Tracking WIP lets you see what’s in the production pipeline to schedule staff and meet orders. For instance, a clothing retailer can view unfinished garments at the cutting, sewing, or finishing stages to align production with incoming orders.

#3: Finished Goods

Whether you purchase them from a vendor or manufacture them in-house, finished products are complete and available for sale. For most retailers, finished goods are the primary inventory type and top priority to manage.

This stock should match consumer demand as closely as possible. Monitoring finished goods lets you identify fast-selling items to reorder and slow-movers to mark down or discontinue.

Now, if you want to go a level deeper, you can further divide finished goods into specific sub-categories. Remember: The more data you have, the better you manage inventory.

Fast-moving goods: Products that sell quickly and need to be reordered consistently. Think popular sizes and seasonal bestsellers.
Slow-moving goods: Items with a slower turnover and lower sales velocity. They may be niche products or styles that aren't popular anymore.
Excess inventory: Stock that exceeds actual consumer demand. You might have obsolete products or overstocks from bad forecasting.
Defective goods: Products that are damaged, defective, or expired. You'll have to write these off or return them to vendors.
Lost or stolen goods: Theft — whether by customers or employees — happens. Staff also make errors or miscount goods.
In-transit inventory: Ordered products that are still in transit from the vendor to the retailer.

Segmenting finished goods gives you deeper insight and more control of your stock. For example, fast-moving SKUs typically need higher safety stock levels and require more frequent replenishment orders.

#4: Maintenance, Repair, and Operations (MRO)

MRO inventory includes support materials like replacement parts, tools, hardware, and supplies used internally. When you have enough MRO inventory, you’ll reduce operational disruptions.

As a retailer, you might track replacement parts, light bulbs, cleaning supplies, and more.

#5: Packing Materials

Last, packing materials like shipping boxes, labels, hang tags, and packaging are essential for fulfilling orders. The last thing you want is to delay deliveries because you don’t have the right boxes in your warehouse.

For example, an e-commerce retailer will always stock bubble wrap, tape, and different box sizes to support its high volume of online shipments.

Chapter 3

Types of Retail Inventory Management Systems

Now that you know the types of inventory you’ll manage in your retail store, let’s explore some of the systems and tools that help. The method you choose depends on the size of your store, your personnel, and which products you sell.

#1: Perpetual Inventory System

A perpetual inventory system continuously records each sale and purchase transaction to provide real-time updates for current inventory.

For example, a clothing boutique can track sales daily, plus new deliveries in its POS system. With inventory tracking in real time, they’ll know how many of each size and style they have on hand.

The main benefits here are visibility and accuracy. You’ll always know what’s in stock at any given moment by tracking ins and outs. There will be no more out-of-stocks, and you can see when SKUs are getting low.

The only drawback is that you’ll need to record every transaction without fail, and if employees make errors, or worse, take part in elaborate schemes to steal from your store, you might find various discrepancies come audit time.

#2: Periodic Inventory System

The periodic inventory method involves physically counting, auditing, and updating complete inventory records at set intervals. Depending on the business, this might occur daily, weekly, monthly, or less frequently.

Instead of tracking every sale and transaction, you’ll perform a full count when the new cycle hits. While it’s simpler to implement, with lower demands on your staff, you will have limited visibility.

A small hardware store with low sales velocity might do a full store inventory on the first of each month and be fine. But a clothing store with a high turnover would struggle to stay on top of everything.

It’s a risk that could lead to selling products you don't actually have, disappointing customers.

#3: Just-in-Time Inventory

Just-in-time, or JIT, inventory management helps minimize on-hand stock as much as possible. The idea is to receive stock just in time to fulfill orders. You’ll then look to sell stock quickly. Benefits of the JIT approach include:

Reduced carrying costs and more storage space (particularly useful for small stores)
Lower risk of losses and products becoming obsolete
Frees up working capital
Increases inventory turnover

But what if demand spikes? Or supply chains falter? You’ll be unable to buffer with safety stock and must rely on vendors and logistics.

#4: Barcode Inventory System

Barcode-based inventory management automates tracking by scanning barcodes during each transaction.

Barcode scanners at the point of sale deduct items from inventory as they’re sold, while inventory is updated by scanning barcodes on incoming inventory.

It’s a great way to reduce human error in manual data entry. Inventory updates happen seamlessly with sales activity. Barcode systems also speed up checkout and receiving. On the downside, barcode systems require an initial tech investment in scanners and configuration.

Chapter 4

6 Benefits of Retail Inventory Management

For any retailer, minimizing losses and increasing profit margins are critical. The benefits of effective inventory management are clear.

#1: Improves the Customer Experience

Your customers expect the products they want to be in-store. They don’t know what goes on behind the scenes. All they know is that they’ve seen something they want and expect you to have it in stock — especially if it’s a popular product.

Poor inventory management risks disappointing customers and forcing them to shop elsewhere. You’ll lose sales and loyalty. On the other hand, meeting shoppers' expectations for product availability improves your reputation, customer retention over time, and overall lifetime value.

With predictive analytics, you can forecast demand.

#2: Reduces Carrying Costs

With already slim profit margins, the last thing you want to do is tie up cash. If you have products taking up space that you can’t shift, you’ll incur storage, handling, insurance, interest, and other carrying costs.

Having the right amount of inventory on hand allows you to align with actual sales volumes and customer demand. Keeping only the necessary stock on hand frees up cash flow that you can reinvest in the business.

#3: Increases Inventory Turns

The faster you can move products from your shelves into your customers’ hands, the greater the return on your inventory investment. Higher inventory turnover ratios mean each dollar you invest in buying stock generates sales, leading to higher profits.

You’ll need to understand demand forecasts, consumer trends, and buying cycles — more on that later.

Pro Tip 1

#4: Lowers the Risk of Losses

Excess merchandise you can’t sell doesn’t just increase carrying costs — it also leads to markdowns when they expire or become obsolete.

Grocery stores often struggle with perishable goods expiring, which is why they try to rotate inventory more efficiently. But retailers can struggle just as much. For example, a clothing store that can’t sell its fall range will need to run promotions and sales to make room for new stock.

#5: Enables Omnichannel Fulfillment

Modern consumers expect a seamless shopping experience across all channels and touchpoints. To satisfy them, you must have inventory visibility and coordination across brick-and-mortar stores, e-commerce, mobile apps, and more.

With a cloud-based POS system, you get a unified view of your inventory, so you can sell products anywhere your customer chooses to shop and fulfill orders efficiently.
Omnichannel inventory integration better meets consumer expectations. An e-commerce integration will help meet consumer expectations.

#6: Saves Staff Time

Without inventory management tools, your employees will use a lot of manual effort to track stock levels and count inventory. It’s easy to lose concentration and make mistakes, and it’s a waste of time! Instead, inventory management tools automate this process.

Your staff can now work on higher-value tasks and provide stellar customer service.

Chapter 5

Best Practices in Retail Inventory Management

Managing inventory is an ongoing process — you can’t set it and forget it — even with tools that automate the process. You need to continuously monitor stock levels, sales activity, and purchase orders to get the most out of your tools and drive profit.

Let’s look at five best practices you can work on.

#1: Conduct Regular Cycle Counts

As ideal as automating inventory is, you’ll still need to perform physical counts occasionally to ensure that what’s in your POS system matches the stock on hand. There is no need to shut down your whole store — use cycle counting of different product zones to limit disruption.

Pro Tip Black 2

Pro Tip: Your POS system is a key player in this process, helping to identify high-shrink areas to prioritize for cycle counts.

#2: Monitor Fast and Slow Sellers

You can use various methods to monitor how quickly you sell through stock. ABC, XYZ, or FSN are all legitimate methods that show similar things.

The ABC method divides inventory into three groups:

A are your most valuable products, the 20 percent of inventory that accounts for 80 percent of sales
B is the number of mid-range products you can’t fit into A or C
C is the number of products that sell the least

The XYZ method is similar and helps to forecast sales:

X products are in demand
Y products are sometimes in demand
Z products are hard to predict

The FSN method focuses on sales velocity:

F stands for fast-moving inventory
S refers to slow-moving products
N is non-moving products

Each method provides the accurate data you need to forecast sales, make decisions about how to store and sell your products, and inform promotions and markdowns. It’s important to consider other factors that influence sales, such as seasonal fluctuations and changing customer demand.

Pro Tip Black 3

Pro Tip: Invest in a POS system that offers prebuilt yet customizable reports on top-selling and low-performing products, as well as inventory, customer, and employee reports.

#3: Set Par and Safety Stock Levels

Par levels establish ideal quantity thresholds for each product based on average sales and lead times. Your POS system can track sales trends and set par levels. Buffering par levels with safety stock protects from variability in demand and delays.

At the same time, start setting reorder thresholds. Once your stock hits a certain level, you can set reorder notifications or automate reordering if your system allows it.

#4: Improve Your Supply Chain

Proactive vendor management is crucial to better inventory management. Be transparent with vendors; share sales reports and forecasts and ask for precise lead times.

How are your vendors performing? Do they deliver on time? Are products always in good condition? You can communicate how you want things to improve and explain how vendors can meet your needs. On the other hand, you can build better relationships with suppliers doing a great job.

#5: Aim for Efficiency, Not Perfection

Retail is constantly changing — customer demand fluctuates unexpectedly, economic conditions change, and there’s always something out of your control. But with your finger on the pulse, you can aim to make things more efficient, not perfect.

From how you lay out your store to the way you organize your warehouse, there are ways to make inventory management work for your business.

Taking steps to combat shrinkage, like improved security, setting employee permissions at your point of sale and on your tools, and better stock rotation
Identifying high-velocity products and ordering the right amount of stock
Using cloud-based systems to provide a unified view of your online and physical stores

Efficient operations yield higher profits and satisfied customers — it’s something to work towards.

Related Read: What Is Inventory Shrinkage in Retail? 8 Ways To Prevent It

Chapter 6

5 Steps To Implement Effective Retail Inventory Management

Step #1: Set Up Your Inventory Management System

Choose the method or system that best fits your unique store. It should meet your current and future needs. Key features include:

A central database that allows unlimited SKUs
Cloud-based features so you can track stock across multiple locations and channels and access data at any time
Integrated receiving and ordering for better supply chain management
Robust reporting and analytics to help make data-driven decisions

It’s best if your inventory management software is baked into your POS system. You should also enter complete product details, such as images, descriptions, pricing, and vendor information — and train staff on proper system use.

Step #2: Conduct an Inventory Count

Before overhauling your inventory process, start by reconciling your inventory. Close the store or pause sales, then systematically count each item by SKU, noting product condition, expiration dates, and exact quantity. Double-check counts for accuracy.

Record any discrepancies between the physical count and your inventory system. Then, update the system to match the audit. Do this regularly going forward.

Step #3: Implement Inventory Control Measures

With your inventory management system in place and firing, start to implement controls to optimize your stock levels, inventory turnover, and processes. As we touched on earlier:

Set par and safety stock levels, and reorder points for each product based on sales velocity.
Use cycle counting for ongoing accuracy.
Strategically organize your warehouse or stock room to improve efficiency.
Streamline checkout to get customers through as quickly as possible.
Create processes for receiving, transfers, damages, and returns.

All of this together helps to control inventory and focus on turning a profit.

Step #4: Create Repeatable Procedures

Processes and procedures make inventory control airtight. They help employees know what to look for and give them something to follow, helping to minimize errors and avoid confusion. Some examples of processes and procedures include:

Markdowns and promotions: Decide when to offer markdowns and be disciplined when discounting slow-selling items. For example, you might run a sale on your summer collection just before your fall collection arrives. If you plan to run a promotion, leave enough time to ensure you have enough stock to meet demand.
Stock receiving: When products arrive in your warehouse, you should verify orders and plug them into your inventory system. You need an established procedure to ensure there are no errors or damage to products. Verify that the contents match your order and follow up with vendors. Then, enter the new products into your inventory system.
Customer returns: You should have a procedure for customer returns to avoid holding unsellable stock — and your staff should be aware of this procedure. If an item is damaged, return it to the vendor or send it for repair. If it's sellable, add it to your inventory count.

These are just some examples of the processes and procedures that make inventory management more effortless.

Step #5: Review Inventory Performance Regularly

You’ve set your goals, implemented best practices, and are ready to manage your inventory like a boss. It doesn’t stop there, however. Your POS system is a goldmine of data, and you can use reports and key performance indicators (KPIs) to identify problems and opportunities.

For example, you can look for seasonal trends. You can look at historical sales data to inform purchasing decisions. Check for discrepancies that indicate shrinkage issues. Or evaluate supplier lead times and performance. The options are endless — and the best retail POS systems come with prebuilt reports that are easy to use and understand.

Related Read: POS System for Retail: 3 Important Features You Need

Chapter 7

How Retail Inventory Management Software Powers Your Small Business’ Success

A dedicated inventory management software solution can transform your entire operation. Remember the statistics we highlighted earlier? By now, you can see why inventory management is crucial to success, no matter the size of your store.

You’ll improve customer service and satisfaction because you can provide an omnichannel experience. Customers expect the things they want to be in stock. Store associates can instantly check if items are in stock at another location to fulfill orders. For online sales, customers can see up-to-date inventory quantities before purchase.

Accurate inventory tracking is essential. With e-commerce capabilities, cloud-based software, and POS integrations, you can perform accurate stock counts and update inventory in real time.

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Some systems let you generate replenishment orders and purchase orders based on par levels and other data. This ensures optimal reordering tailored to sales patterns and demand forecasts. Unnecessary overstocking is avoided.

Overall, the automation, visibility, and business intelligence enabled by inventory management systems reduce manual work for staff, minimize costs, and maximize sales.

Related Read: 5 Essential Inventory Management Software Features (+5 Top Tools)

Chapter 8

How To Choose the Right Inventory Management Software

Not all inventory management software is built the same. Consider these factors in your search:

Ease of use: Plug-and-play software is ideal. It should be easy to set up and use. Look for an onboarding process and 24/7 support from your vendor.
Scalability: Pick a system capable of handling your sales volumes today and supporting rapid growth down the road.
Cloud-based: Opt for a cloud-based system accessible from anywhere with an internet connection.
Integration: The system should integrate with your POS, e-commerce platforms, accounting software, and more.
Analytics: Modern, robust inventory management software can quickly analyze trends, patterns, and historical data to provide detailed reports.
Pricing: Consider your budget and needs. Many providers offer different plans based on your current and projected inventory size and sales volume.

Armed with this information, you can create questions to ask potential providers, helping you make an informed decision.

We might be biased, but at Comcash, we’ve spent 25 years working with retailers to optimize inventory management and growth.

Our cloud-based POS solution features integrated inventory management software that lets retailers manage their stores from anywhere. We’re known for having best-in-class customer support and are dedicated to helping retail store owners win.

Chapter 9

Follow These Steps for Mastering Retail Inventory Management

Inventory management isn’t something you should do; it’s something you must do if you want to drive growth and profitability. Maintaining optimal inventory levels minimizes carrying costs, avoids lost sales, and delivers an exceptional customer experience.

There’s no need to feel overwhelmed as a small business owner. Investing in inventory management software and a robust POS system will give you the tools you need to succeed. The trick is choosing the right provider and getting to know the capabilities of your tools.

We want you to find the right tools for your needs. To that end, we recommend scheduling a demo of our system so you can get an in-depth view of its features and make the best decision for your small business.