How to manage inventory

business.gov.au describes inventory management as organising, tracking and controlling the stock your business holds. It should tell you, whenever you look, what you have on hand, what needs ordering and when to restock.

It is an everyday job rather than an occasional event. A stocktake checks the records from time to time; managing inventory keeps them right in between. business.gov.au recommends regular reviews and updates of your inventory records, so errors don't become costly and your decisions rest on current figures. The ATO makes a similar point from the record-keeping side: among the benefits of accurate, complete records, it lists tracking your income and stock levels.

business.gov.au describes two approaches: updating the records by hand, in a spreadsheet or on paper, or using software or a point-of-sale system that updates them automatically with each purchase and sale. It suggests picking one that is easy to use and can grow with the business, and trying out a few options, or getting professional help, before you decide.

Whichever you use, the records are only as good as what goes into them. A point-of-sale system can record sales as they happen, but deliveries, returns and damaged stock can still need someone to enter them.

business.gov.au stresses recording each sale and each return, and notes that under a manual system the records need updating every time a sale is made or a return processed. The movements to record are:

• Stock in: deliveries from suppliers, checked against your order and the delivery docket before you enter them, and customer returns that go back on the shelf.
• Stock out: sales, goods sent back to suppliers, and items removed because they are damaged, out of date or used up in the business.
• Stock moved between locations, such as from a storeroom to a shop or a van, so the figure for each location stays right.

Each line has a document behind it: the sales records, the supplier's delivery docket and bill, the return note, or a note of what was damaged and who found it. business.gov.au points out that records kept up to date also show patterns over time, such as your busiest days or months and the products customers often bring back.

Your inventory list is the master record behind every count and order. business.gov.au suggests a line for each product or material with its name or code, description, quantity, supplier, cost and selling price. Those details only help if they stay current:

• Add a line for a new product before its first delivery arrives, so the delivery has somewhere to go.
• Update the cost when a supplier changes its price, and the selling price when you change yours.
• Mark discontinued lines as inactive rather than deleting them, so their sales history is still there.
• Give each item one code and use it everywhere, on shelf labels, count sheets and orders, so the same product isn't recorded under two names.

In business.gov.au's definition, a reorder point is the lowest quantity of an item you want to hold before placing a new order. With one set for each item, ordering stops being guesswork: when stock falls to that level, you reorder. To set reorder points by hand, business.gov.au's method comes down to these steps:

1. From your sales records, find how many of the item you usually sell in a week or a month.
2. Find the delivery time: how long it takes from placing an order to having the stock ready to sell.
3. Adjust for busy seasons, a supplier that is sometimes late, and any sales or promotions you are planning.
4. Set an alert in your system, or a reminder in your calendar, for when stock reaches that level.

The starting point is usual weekly sales multiplied by the delivery time, which covers what you expect to sell while an order is on its way. The extra allowance covers what that sum leaves out: here, a lamp supplier that often delivers late and a busy season for markers. Review the points when sales patterns, suppliers or delivery times change.

business.gov.au mentions that some inventory tools work out reorder points automatically, warn you when stock runs low and, in some cases, reorder for you. It also links buying to cash flow: anticipating what customers will want, and buying at a good price and at the right moment, leaves more cash and more shelf space free.

Stock that sits on the shelf holds cash the business could use elsewhere. business.gov.au makes the link directly: stock left unsold is money the business doesn't have. Its advice is to stop stock levels climbing too high, and to get rid of lines that aren't selling, have expired or no longer serve a purpose.

To find slow stock, compare what you hold with what you have sold recently. business.gov.au's cash flow guidance suggests using sales trends to separate popular lines from unpopular ones, and checking the latest stocktake for anything that isn't moving. Look out for:

• items with no sales since the last count
• items where the quantity on hand would last many months at the current rate of sales
• items close to their use-by date, or tied to a season that has passed
• lines a supplier has stopped making, or that customers keep returning.

Then decide what to do with each one. business.gov.au suggests deciding which items to reorder and which to stop selling, running a stocktake sale to bring stock levels down before a count, and thinking about buying some stock only when a customer orders it. Record what you do: a markdown changes the selling price in the item list, and stock thrown out is a movement out with its reason noted. How slow, damaged or out-of-date stock is valued in the accounts is a question for your accountant.

Most businesses, according to business.gov.au, do a stocktake monthly or quarterly. Smaller checks in between keep the records honest:

• Count fast-moving or high-value items more often than the rest.
• Count an item when it reaches its reorder point, before placing the order, so you don't order on a wrong figure.
• Count one section of the storeroom each week, so every item is checked over time.
• Check each delivery against its docket as it is unpacked.

When a count disagrees with the records, find the cause before you change the figure, and note each correction with its reason. Our guide to doing a stocktake covers how to run a full count and work through the differences.