In a business that sells merchandise, inventory management is critical to the future success of the endeavor. Correct inventory tracking helps accurately account for one of the largest expenses of this type of business, the cost of goods sold. In addition, monitoring your inventory is crucial for having the correct merchandise in stock at the right time in order to meet your customers' needs more effectively and enhance your bottom line. Most businesses institute a system that allows them to accurately and effectively keep track of their inventory.
Complete a beginning physical inventory. You should set a regular time at least once a year to perform your inventory, with some businesses performing inventory as often as weekly. The physical inventory ensures that someone has put his hands on each item you have in stock, so that when it is entered into a tracking system, the count is as accurate as possible.
Assemble the inventory information. Many companies use inventory sheets to record the amount of each item, but some use computerized counting systems, which speed up the physical inventory process. Still other companies use a single tag where each item's information is entered on a paper tag, and the tag is placed with the items counted. Another person may go behind the first counters and verify the accuracy of the counts as she collects the tags.
Enter the inventory information into your point of sale system. Depending on the size of your inventory, you will probably enter the inventory into a computer-based system, but you may use a paper-based system for smaller inventories. A point of sale system will require you to enter each item number, as well as the cost and selling price of the item. You may also need to enter a description. Electronic physical inventory systems may provide a method for direct entry into the point of sale system.
Track each item at the point of sale. This is often done by entering an individual item number when a customer purchases an item. You may choose to use scanners to read the Universal Pricing Code of each item as you process the sale. The POS system will look up each item and its cost, and enter it as part of the sale. When the sale is completed, the POS system will subtract the items automatically from your inventory counts, or you may need to process each sales slip at the end of the day if you are using a paper inventory record.
Review inventory values and other information from the financial statement. Be certain the total value is within the ideal range that you have set. Calculate inventory turn, which is the amount of times that you sell through your complete inventory dollars per year. The acceptable turn varies, but four to five turns per year is average. Also track inventory items that you have had in stock for a long time without a sale. You may want to target these items for price reductions to encourage a quick sale. Also review fast-moving items that you do not have in stock for potential ordering.
If you are still using a paper-based point of sale system, consider switching to a computer-based system. It is usually much easier to manage, unless you only have a few items in your inventory.
Watch for large amounts of shrinkage in your inventory. Shrinkage points to a potential problem, such as poor record keeping or theft.
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- HP Small and Medium Business: Building a POS Solution -- Common Useage
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- Masao Nakamura, Sadao Sakakibara and Roger Schroeder. "Adoption of Just-in-Time Manufacturing Methods at U.S.- and Japanese-Owned Plants: Some Empirical Evidence," pages 230-231. IEEE Transactions on Engineering Management, 1988.
- Electronic Code of Federal Regulations. "Regulation S-X, 17 CFR Part 210: Sec. 210.5-02 Balance sheets." Accessed Aug. 1, 2020.
- If you are still using a paper-based point of sale system, consider switching to a computer-based system. It is usually much easier to manage, unless you only have a few items in your inventory.
- Watch for large amounts of shrinkage in your inventory. Shrinkage points to a potential problem, such as poor record keeping or theft.
Craig Woodman began writing professionally in 2007. Woodman's articles have been published in "Professional Distributor" magazine and in various online publications. He has written extensively on automotive issues, business, personal finance and recreational vehicles. Woodman is pursuing a Bachelor of Science in finance through online education.