According to the U.S. Small Business Administration, inventory represents 45% to 90% of all expenses for small businesses. How you manage inventory says a lot about the potential for your business’ success: Getting caught short with stockouts can lead to lost sales opportunities and disappointed customers; having too much inventory on hand increases capital carrying costs and storage costs as well as erodes profits.
If you read our previous blog, “Why you may need inventory-management software,” you should have a pretty good idea of whether software can help you improve your inventory management. What you might be wondering, however, is what you can expect that software to do for you. That is, from a business-needs perspective, what kind of capabilities should any inventory-management software provide?
Here is a list of eight key capabilities that any inventory-management software you use or are considering should offer.
1. Connect front and back office systems
How great would it be to give your marketing, sales, finance, and legal teams transparent and up-to-date data about inventory as it relates to each of their functions and each of your customers?
Inventory management software can do that by displaying information and access points related to your company’s inventory items. That includes a summary of item information, access to recently used inventory reports, and a graphic analysis of how the cost of sales is trending.
In addition, software makes it easy to perform a specific task by displaying a clear inventory-management flow.
2. Go beyond quantities on hand
Many small businesses (especially small manufacturers) need to process large quantities of information about individual inventory items or services. Here are some key tasks inventory-management solutions should help with:
- Perform quick research and comparisons so you can make good stock-reordering decisions.
- Understand the relationships between quantities, usage, and complex assembly processes.
- Understand the performance of an item/service while moving through your sales and purchasing processes.
Consider the example cited by Sage 50 Quantum customer Jeffrey Burgess: “It’s not enough to know that I have ‘x’ sheets of laminate or particle board. I need to track what apartment complex bought what color, and what size cabinets the particle board was used to build. I have to have the ability to take the raw materials and turn it into inventory, and Sage 50 lets me do that.”
3. Accommodate your costing method of choice
Whether you use inventory-management software or not, your business will have selected its costing method, which has crucial tax implications. Software should support your costing method of choice, whether it’s first-in, first out (FIFO); Last-in, First-Out (LIFO); weighted average; or specific unit.
4. Offer robust reporting capabilities, including templates
Keeping track of the amount and cost of inventory is a key functionality of any software, so any system you choose should have a strong roster of reporting templates. Examples of industry-specific reports include assembly planning, production schedule, and component pick list.
5. Easily record inventory adjustments
Occasionally, you may need to record adjustments to on-hand quantities of inventory items. Software should make it easy for you to make these adjustments and track them.
6. Set up and execute quantity discounts
Software should let you set up your inventory so that when a customer purchases a specified amount of an item, its sales price is discounted by a percentage or a set amount. For example, you could give customers a 10% discount if they purchase 50 or more of a certain inventory item.
7. Establish multiple price levels
Software should let you set up price levels that charge different prices to different customers. For example, a regular customer who buys large quantities of an item may get a better price than the occasional customer who only buys one of that same item.
8. Be easy to use and deliver strong return on time invested
In terms of the effort, you or your staff need to invest before you begin to see results, inventory management software should give you a big payoff from minimal effort.
Among the other functions it performs, Sage 50 adjusts inventory levels each time you post a purchase or sale of an inventory item. In addition, it should track the cost of each item on a daily basis, based on the transaction date and item class. In Sage 50, getting to the point where you can track inventory in these ways is basically a three-step process:
- Enter the item information, including sales account, inventory account, and cost-of-sales account.
- Use item codes when entering purchases and sales.
- Enter adjustments, if necessary, through an inventory-adjustments feature.