Last Updated August 12, 2025
Managing inventory effectively can be one of the biggest challenges for small business owners.
Optimizing inventory has a direct impact on your ability to operate efficiently, satisfy your customers, and maintain a good profit margin. On the other hand, failure manage inventory wisely results in overstocking, stockouts, and other issues that negatively impact the customer experience.
Fortunately, there are many relatively straightforward ways to improve inventory management. By making this task a priority and using tried and tested inventory management tips, you can keep your business running smoothly.
Why Is Managing Inventory Effectively Important?
Effective inventory management helps you improve cash flow, as it means you’re keeping a necessary quantity of each item in stock—not too little or not too much.
For example, avoiding excess inventory means you won’t have to rack up extra storage costs or waste money on items that don’t sell. At the same time, having enough products on hand to meet customer demand and avoid going out of stock will help you maximize your sales potential. It’s a careful balance that can lower your operating costs or your sales potential.
Consistently meeting demand and being able to provide accurate orders thanks to quality inventory management will improve customer satisfaction and build brand loyalty, which is essential for the long-term health of your business.
With sound inventory management practices in place, you’ll also be better able to forecast future demand and allocate resources, making your business more agile and effective. It will help you manage periods of rapid business growth and stay financially healthy at every stage.
Responsibilities That Come With Managing Inventory
Inventory management improvement covers a wide range of tasks and responsibilities. A crucial first step in developing plans involves forecasting future demands for products. Forecasting influences coordination with suppliers to ensure that raw materials and/or finished products are delivered in a timely manner.
Managing suppliers is another key area of inventory management. Having a reliable supplier who can provide timely deliveries at an affordable price goes a long way. Working with suppliers often requires negotiating prices, delivery timelines, inspecting and verifying received shipments, and more.
Once the business has received inventory, it needs to maintain accurate records of inventory at every step of the supply chain, whether it’s being stored in a warehouse or shipped to a customer. Tracking and auditing inventory records allows businesses to optimize their inventory levels based on supply and demand.
With these and other tasks, the business should always look for ways to minimize their costs and improve their ability to meet customer demand by making the right products available at the right time.
How to Improve Inventory Management
Looking for small business-specific inventory management ideas that will help you improve your current practices? The following inventory management tips are a great place to start.
1. Make a Habit of Tracking Inventory KPIs
Tracking inventory KPIs is an essential first step. Tracking inventory KPIs is how you will be able to identify whether your other practices are having the desired results.
Here are some of inventory KPIs that may be helpful for your business to track:
• Days inventory outstanding (DIO): How long it takes to turn inventory into sales
• Days sales outstanding (DSO): How long it takes to collect payment after a sale
• Accounts receivable turnover ratio: How effective you are at collecting credit debts from customers
• Sell-through rate: The percentage of inventory sold (in comparison to how much you received)
• Fill rate vs. backorder rate: The percentage of orders that can be filled with available inventory, as opposed to orders that can’t be filled immediately because items are out of stock
• Inventory carrying cost: The total costs of holding inventory (including storage, insurance, etc.)
2. Complete Regular Inventory Audits
Performing inventory audits ensures that your inventory records and financial records align. These audits should be conducted on a regular basis. Most businesses do monthly or quarterly audits for high-value items, and full inventory counts on an annual or semi-annual basis.
During the audit, your team physically counts items in each warehouse, then cross-checks the counts against your financial records and inventory management system data. Any discrepancies should be investigated to look for issues such as damage or theft. These audits are also a good opportunity to analyze the overhead costs and market value of your current inventory.
3. Categorize Inventory Into ABC Groups
As part of an inventory analysis, most businesses classify their inventory into three groups or classes. Group A includes high-value items. While only representing 10% to 20% of the inventory, they make up as much as 80% of its value, so they require frequent review and forecasting.
Group B includes moderate-value items. They make up roughly 15% to 20% of inventory items, and a similar percentage of inventory value. Finally, Group C contains the low-value items that make up the majority of inventory, but as little as 5% of its value.
4. Follow the 80/20 Rule
The 80/20 rule is the idea that 80% of results come from 20% of efforts. This means focusing your inventory on the 20% of products that drive the top 80% of sales and profit.
Adjusting and optimizing your inventory in this way to maximize profits requires continual monitoring so you can adjust your inventory for different areas, customer groups, and so on.
5. Forecast Future Inventory
Forecasting future inventory relies on your historical data while also looking at market trends, seasonal patterns, and other factors that could influence sales in an upcoming period. By using this information to predict demand for items in your inventory, as well as calculating how much time you’ll need to order and receive new stock, you can ensure you have sufficient stock on hand for the next sales period.
6. Invest in Inventory Management Software
Investing in inventory management software can automate data collection and input for inventory levels and movements, giving you real-time visibility into stock levels for each item.
Many software programs automate stock counting and purchase order generation, and can send automated alerts when you need to take action to avoid under-stocking or overstocking an item. They also enable more accurate inventory forecasting. With the right software, you’ll have better information to optimize inventory levels in a way that reduces costs and maximizes efficiency.
7. Regularly Evaluate Your Suppliers’ Performance
Your suppliers play a vital role in managing inventory. A supplier who regularly has late shipments, damaged items, or other issues can cause serious problems for your bottom line. Similarly, supplier price changes could lower your profit margin on certain items.
Regularly evaluating supplier performance will help you identify if a supplier is too expensive or if they have issues with item quality or delivery speed that are hurting the customer experience. Don’t be afraid to switch suppliers when necessary.
8. Set Minimum Stock Levels
Setting minimum stock levels establishes a baseline for the lowest amount of inventory you want to keep in stock to avoid stockouts and lost sales. When you reach that threshold, you submit a reorder to replenish the inventory of that particular item. This ensures you always have enough stock on hand. This practice can also improve inventory forecasting.
Setting a minimum stock level is easy with inventory management software, which can automate inventory tracking and even the creation of purchase orders.
9. Use the FIFO Method
The FIFO (first in, first out) method is a great solution when trying to figure out how to improve inventory management control. The idea is that the oldest inventory is moved out before you bring in new inventory. This helps keep your business from holding on to obsolete inventory or, in the case of businesses that sell perishable items, expired and unsellable inventory.
10. Track Stock Levels
Tracking stock levels is one of the most important inventory control tips for small businesses. Making this a regular habit allows you to identify sales trends (such as which items are your best sellers), know when you need to restock select inventory, and draw on information to forecast future demand. Most inventory KPIs rely on accurate stock level tracking.
With inventory management software, you can automate stock level tracking through barcode scans or other activities, ensuring you always have real-time information at your fingertips.
11. Optimize Storage
You can also take steps to optimize your storage space. Classifying and categorizing items based on historical sales data and value can help you determine where to place them, as well as how much of each item should be stored in your facility.
On a practical level, you should maximize storage capacity by grouping similar items together and using appropriate shelves or racking when appropriate, especially vertical storage.
Organize your aisle placement to avoid wasting space and allow for efficient movement of your items, particularly if you need to use equipment like forklifts or conveyors. Always consider accessibility and logical placement of each item so they can be easy to find.
12. Explore Inventory Financing Solutions
Balancing cash flow and inventory needs can be a real challenge for small businesses.
Inventory financing, a type of asset-based lending, is a model used by some businesses in which they use their unsold inventory as collateral for a loan. Businesses will often use this to purchase inventory in bulk before a busy sales season (such as the holidays) or when they need to fill large purchase orders.
This essentially allows the business to avoid paying up front for inventory purchases, especially for large orders. While this can allow you to meet periods of high demand, the risks include inventory depreciation, fluctuating demand due to market conditions, and additional storage costs that can make it hard to repay the debt.
13. Use Invoice Factoring to Optimize Inventory Potential
Another solution for improved inventory management is to use invoice factoring.
Also known as accounts receivable factoring, this financing solution allows you to sell unpaid invoices to a factoring company. The factoring company offers an immediate cash advance worth 80% to 90% of the value of the invoice. This isn’t a loan, and you can use the money right away to make inventory purchases.
After your client pays their invoice to the factoring company, you receive the rest of the invoice, minus a factoring fee. This allows you to optimize your cash flow without going into debt, giving you more financial stability as you make inventory-related decisions.
In-Summary: Inventory Management Tips
Proper inventory management is one of the most important factors for any business’s success. In fact, without following these and other inventory management tips for small business owners, your business could fail.
Fortunately, with tried and tested inventory management ideas to follow, you don’t have to leave this essential part of your business to chance. By prioritizing and optimizing inventory management, you can deliver a better experience for your customers—and your own bottom line.
Michael McCareins is the Content Marketing Associate at altLINE, where he is dedicated to creating and managing optimal content for readers. Following a brief career in media relations, Michael has discovered a passion for content marketing through developing unique, informative content to help audiences better understand ideas and topics such as invoice factoring and A/R financing.
