Business Automation and Software Blog

When Should a Small Business Invest in an Inventory Management System?

Posted by Robert Baran on Fri, Oct 22, 2010 @ 02:52 PM

Are inventory management mistakes being made in your business? Large companies use inventory control systems to manage their warehouses, but how can smaller businesses compete? The basic problem for most small or medium-sized business owner is they think that they cannot justify the cost. Inventory control systems seem just too expensive. However, there are solutions to this problem.

An inventory control system is an investment. Like any other investment, you have to know when it pays for itself and yields a return. From a business perspective, you want to know when you will break even. That's the point in time when your investment has paid for itself, and now you can relax knowing your investment is profitable. So, how do you determine when an inventory control system pays for itself?

The basic principle is that your company's bottom line should benefit greater than the cost of the system. You should get more in return than you spend. In other words, it could be costing you money every year not to have an inventory control system. How can the average small business owner figure all this out?

If you currently have products that aren't moving, then count them. How much did they cost? You normally need to account for these as non-current or fixed assets on your balance sheet. Your accountant might be able to tell you how much it cost in previous years. If the cost of buying and storing those items is more than the cost of the inventory control system, then you're done. You know that the system will pay for itself this year.

Theft and loss is another important reason for inventory control. If you're not tracking theft or loss, then your business is open for the taking. Manual inventory control is flawed at the receiving stage. Employees or vendors can simply fail to report items received. You might figure it out eventually, but how much time will pass before you do? An inventory control system will quickly tell you if people are stealing from your business. A quick response to theft should be enough to justify the cost of an inventory control system.

There's also the times when you lose sales and customers. Lost sales are tougher to measure, but they definitely count. A simple method of tracking lost sales is to have employees keep a record of them. Record when a customer orders an item and when you don't have it. The cost of these lost sales should be factored into your decision to buy an inventory control system. Keep in mind that you have no way to know how much you've lost because the customer never comes back.

Finally, there's the cost associated with tracking inventory manually. How much time do you pay your employees to track inventory? What about your time and how much is it worth? Reporting alone can be very time consuming. A report that takes you hours to create can be generated instantly with software. If you value your time highly, then put a price on it and factor it in.

There are many areas in your business where you will benefit from automated inventory control. Add up the cost of all these together and you will see that these costs are very likely more than purchasing an entire system and putting it into operation. When you realize your business can't afford to be without an inventory control system, you'll be on your way to increased efficiency and profitability.

Adapted by an article by Judy Hendershot posted on