Inventory Management System – Complete Guide

Before modern software, a business tracked inventory with a pen and paper and painstakingly counted inventory one by one. Next, they’d carefully enter inventory records into a spreadsheet.

Although such inventory management strategies still have their place in inventory management today, a growing business will eventually need more robust strategies to save time.

Businesses at this stage usually seek a more sophisticated inventory system. These inventory systems not only save you time but can also unlock better shipping prices, speed up order fulfillment, improve purchasing decisions, and more.

After reading this guide, you’ll better understand how an inventory management system can streamline day-to-day operations. You’ll also be better equipped to know how to choose the best system for you.

Here’s What We’ll Cover:

What Is an Inventory Management System?

What Are the Types of Inventory Management Systems?

What’s the Best Inventory Management System?

What to Look for in an Inventory Management System

Choosing the Right Inventory Management System for Your Business

More Resources on Small Business Accounting

What Is an Inventory Management System?

An inventory management system is a system to manage each inventory item a business owns. Inventory systems combine software, hardware, and typical inventory management processes for efficiency.

More sophisticated inventory management systems use inventory management software to not only streamline day-to-day inventory processes but also to simplify other aspects of supply chain management, such as warehouse management.

What’s the Purpose of an Inventory Management System?

The purpose of an inventory management system is to:

• Improve cash flow by ensuring inventory items aren’t tying up too much capital
• Reduce storage costs by reducing inventory holding costs
• Optimize stock levels by reducing understocking or overstocking of inventory

These are the foundational goals of the most basic inventory management system, even those that don’t use inventory management software.

What Are the Types of Inventory Management Systems?

There are 2 fundamental types of inventory management systems:

• Periodic Inventory Management System
• Perpetual Inventory Management System

Periodic Inventory Management System

The definition of periodic helps you understand this type of inventory management system. In this system, you count inventory periodically instead of constantly.

These inventory systems are commonly used with basic inventory management software such as Excel.

Perpetual Inventory Management System

The definition of perpetual also helps you understand this type of inventory management system. In a perpetual inventory system, you or inventory software counts inventory perpetually as soon as it moves.

Inventory management systems commonly work with more robust inventory management software.  You can also use it with Excel.

An example of a more comprehensive inventory management software is a cloud-hosted inventory management software that connects with technologies like barcode scanners and RFID hardware and gives you real-time data on the go.

Best practices vary widely depending on your industry. The processes of a perpetual inventory system will look different in each business.

What’s the Best Inventory Management System?

Best practices when choosing inventory management systems differ according to a few factors. One size doesn’t fit all.

To optimize inventory costs when choosing an inventory management system, consider the following:

• Business type,
• Number of customers
• Available cash flow

If your cash flow is low, price will be a very limiting factor. The price of perpetual systems tends to be significantly higher than periodic systems.

A periodic inventory management system might best suit a business owner with smaller amounts of inventory. Investing in more advanced processes could be redundant.

As your business scales, you’ll find that the return on investment justifies the upfront price of more sophisticated systems.

What to Look for in an Inventory Management System

Most inventory order management systems use similar inventory management software and basic inventory features. However, inventory management functionality differs widely from business to business.

Basic inventory management system features to look for include:

• Inventory control systems: Involves tracking inventory and stock levels in real-time. Inventory control systems also help predict an ideal inventory order quantity, while also considering ideal safety stock amounts
• Demand Planning: Supply chain management process which forecasts the demand of an inventory item
• Product lifecycle management: Know how long specific stock items are good for and when to get rid of entire product lines
• Finances: Some systems can even perform various inventory valuation method calculations like first-in first-out (FIFO) for your

Additionally, most perpetual inventory management systems offer a suite of integrations with critical software integrations that can help with anything from automatically updating your balance sheet to finding new suppliers. Common integrations in inventory management systems include:

• Shipping integrations like 2ship
• Accounting system like FreshBooks
• Customer relationship management apps like Zoho

Choosing the Right Inventory Management System for Your Business

Both inventory management types have their benefits. However, as your business grows, going from a periodic inventory management strategy to a perpetual one will help reduce human error, optimize stock levels, and ultimately increase your bottom line.

Confused about which is the right Inventory software? Check out our post on top Inventory Management Systems for Small Businesses to discover flexible and user-friendly solutions.

More Resources on Small Business Accounting

• What Is Inventory Valuation and Why Is It Important
• How to Calculate FIFO and LIFO

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