A good inventory tracking system will tell you what merchandise is in stock, what is on order, when it will arrive and what you've sold. With such a system, you can plan purchases intelligently and quickly recognize the fast-moving items you need to reorder and the slow-moving items you should mark down or specially promote.

You can create your own inventory tracking system or ask your accountant to set one up for you. Systems vary according to the amount of inventory displayed, the amount of backup stock required, the diversity of merchandise and the number of items that are routinely reordered compared to new items or one-time purchases.

Some retailers track inventory using a manual tag system, which can be updated daily, weekly or even monthly. In a manual tag system, you remove price tags from the product at the point of purchase. You then cross-check the tags against physical inventory to figure out what you have sold.

For example, a shoe-store retailer could use the tag system to produce a monthly chart showing sales according to product line, brand name and style. Along the top of the chart, he would list the various product lines (pumps, sneakers, loafers), and down the left margin, the various brand names and different styles. At the intersecting spaces down the column, he would mark how many of each brand were sold, in what style and color, whether the shoes were on sale or discounted, and any other relevant information.

Dollar-control systems show the cost and gross profit margin on individual inventory items. A basic method of dollar control begins at the cash register with sales receipts listing the product, quantity sold and price. You can compare sales receipts with delivery receipts to determine your gross profit margin on a given item. You can also use software programs to track inventory by type, cost, volume and profit.

Unit-control systems use methods ranging from simply eyeballing shelves to using sophisticated bin tickets-tiny cards kept with each type of product that list a stock number, description, maximum and minimum quantities stocked, cost (in code), selling price and any other information you want to include. Bin tickets correspond to office file cards that list a stock number, selling price, cost, number of items to a case, supply source and alternative source, order dates, quantities and delivery time. Retailers make physical inventory checks daily, weekly, or as often as practical-once a year at the minimum. Sometimes a store owner will assign each employee responsibility for keeping track of a certain group of items or, if the store is large enough, hire stock personnel just to organize and count stock.

Computerized Inventory Control
While manual methods may have their place, most entrepreneurs these days find that computerizing gives them a far wider range of information with far less effort. Inventory software programs now on the market let you track usage, monitor changes in unit dollar costs, calculate when you need to reorder, and analyze inventory levels on an item-by-item basis. You can even expand your earlier ABC analysis to include the profit margin per item.

In fact, many experts say that current computer programs are changing the rules of the ABC analysis. By speeding up the process of inventory control, computers give you more time so you can devote as much attention to the B and C items as to the A's.

You can even control inventory right at the cash register with point-of-sale (POS) software systems. POS software records each sale when it happens, so your inventory records are always up to date. Better still, you get much more information about the sale than you could gather with a manual system. By running reports based on this information, you can make better decisions about ordering and merchandising.

With a POS system:

  • you can analyze sales data, figure out how well all the items on your shelves sell, and adjust purchasing levels accordingly.
  • you can maintain a sales history to help adjust your buying decisions for seasonal purchasing trends.
  • you can improve pricing accuracy by integrating bar-code scanners and credit card authorization ability with the POS system.

There are plenty of popular POS software systems that enable you to use add-on devices at your checkout stations, including electronic cash drawers, bar-code scanners, credit card readers, and receipt or invoice printers. POS packages frequently come with integrated accounting modules, including general ledger, accounts receivable, accounts payable, purchasing and inventory control systems. In essence, a POS system is an all-in-one way to keep track of your business's cash flow.

Features to consider in a POS system include the following:

  • Ease of use: Look for software with a user-friendly graphical interface.
  • Entry of sales information: Most systems allow you to enter inventory codes either manually or automatically via a bar-code scanner. Once the inventory code is entered, the systems call up the standard or sales price, compute the price at multiple quantities and provide a running total. Many systems make it easy to enter sales manually when needed by letting you search for inventory codes based on a partial merchandise number, description, manufacturing code or vendor.
  • Pricing: POS systems generally offer a variety of ways to keep track of pricing, including add-on amounts, percentage of cost, margin percentage and custom formulas. For example, if you provide volume discounts, you can set up multiple prices for each item.
  • Updating product information: Once a sale is entered, these systems automatically update inventory and accounts receivable records.
  • Sales tracking options: Different businesses get paid in different ways. For example, repair or service shops often keep invoices open until the work is completed, so they need a system that allows them to put sales on hold. If you sell expensive consumer goods and allow installment purchases, you might appreciate a loan calculator that tabulates monthly payments. And if you offer rent-to-own items, you'll want a system that can handle rentals as well as sales.
  • Security: In retail, it's important to keep tight control over cash receipts to prevent theft. Most of these systems provide audit trails so you can trace any problems.
  • Taxes: Many POS systems can support numerous tax rates-useful if you run a mail order business and need to deal with taxes for more than one state.

Perhaps the most valuable way POS systems help you gain better control of your business is through their reporting features. You can slice and dice sales data in a variety of ways to determine what products are selling best at what time, and to figure out everything from the optimal ways to arrange shelves and displays to what promotions are working best and when to change seasonal promotions.

Reporting capabilities available in POS programs include sales, costs, and profits by individual inventory items, by salesperson, or by category for the day, month and year to date. Special reports can include sales for each hour of the day for any time period. You can also create multiple formats for invoices, accounting statements and price tags. Additional reports include day-end cash reconciliation work sheets and inventory management. Examine a variety of POS packages to see which comes closest to meeting your needs.

Every business is unique; you may find that none of the available off-the-shelf systems meet all your requirements. Industry-specific POS packages are available-for auto repair shops, beauty and nail salons, video rental stores, dry cleaners and more. In addition, some POS system manufacturers will tailor their software to your needs. Excerpted from Start Your Own Business: The Only Start-Up Book You'll Ever Need, by Rieva Lesonsky and the Staff of Entrepreneur Magazine, © 1998 Entrepreneur Press