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Raise your hand if you find inventory management easy and fun. Ya, we didn’t think so.
Believe it or not, if you find it difficult to manage your inventory it may be a good sign. It usually means your inventory is selling which is a great problem to have. In other words, if you find inventory management to be difficult, congrats, you’ve made it!
In our blog on Fundamentals of inventory management: How to track your ecommerce inventory, we discuss the difference between managing inventory so you know how much inventory you have and accounting for inventory so you get your P&L and balance sheet in shape, accurately report your taxes, and correctly manage your inventory expenses.
Ideally, a good inventory management process should help you accomplish both inventory management and properly accounting for inventory costs.
In this article, we’ll focus on tools and best practices for inventory management for your Shopify brand. This will help you consider:
- When to manage your inventory through an Excel or Google Sheet and when it's time to move to an inventory management system (IMS), and
- What key features you should be looking for in any inventory management tool.
Let’s whet our appetites first by remembering why inventory management is so important in the first place.
What is inventory management and why is it so important?
Inventory management is the process of tracking your inventory purchases, distributions, and costs. It helps you understand how many products you have left so you can predict and plan for how much you need. Essentially, it helps you manage and maintain your inventory, one of the key costs of your ecommerce business.
To understand how important inventory management is, let’s paint a picture of a world with no inventory system in place (cue scary music).
Let’s say you sell homemade strawberry jam on Shopify. To properly manage your business, you need to make enough jam to meet your customer demand but not too much to sell before the expiration date.
Without understanding how much jam you have and how much you expect to sell, you won’t know how much you need to make, how many strawberries to order, or when to order it. You end up ordering too much and waste money on strawberries that go bad or ordering too little and lose revenue from missed sales opportunities.
In a word, chaos.
It can get even more complex with multiple products. For example, you start offering blueberry jam and apricot jam as well. Maybe you also offer each in multiple sizes or offer a sugar-free version.
Now, let's say you decide to take your jam business to the next level and sell on Amazon in addition to Shopify. Selling across multiple channels can make it even more difficult to track how many jars of jam you have in each warehouse and when you need to start making more.
See the problem? An inventory management system is crucial to keep the jam from hitting the fan.
What tools should you use to manage your inventory?
Now that we identified the problem, let’s discuss the solution. There is no quick fix or one-size-fits-all remedy.
There are two general ways to track your inventory. Alternatively, you can always choose the chaos option described above (not recommended).
- Track the data manually in an Excel or Google Sheet.
- Use an IMS to help you automate your inventory tracking process.
Excel or Google Sheet Inventory Tracking
Tracking your inventory in an Excel or a Google Sheet is a simple and cost-effective way to begin managing your inventory units as well as your COGS and purchase costs.
The downside of using a spreadsheet is that when your stock quantities change (e.g., when you order new materials from a vendor, receive new items into your warehouse, or fulfill a sales order) you or your employees will have to manually update those items in the spreadsheet.
It’s not a perfect solution, but it makes sense for smaller ecommerce businesses that are dealing with a relatively narrow list of products. Automated systems can be expensive and may not make sense for your business at an earlier stage of its growth.
Here are some of the key recommended items that should be included in your inventory tracking template:
- Product number or SKU number
- Product name and description
- Product cost or value per unit
- Quantity in stock
- Quantity sold
- Total inventory value
- Reorder reminders
- COGS
- Other inventory adjustments, such as dead inventory or giveaways
Ideally, your template should have embedded formulas to automatically calculate your inventory balance, COGS, and quantity in stock and alert you when to reorder. Formulas can reduce the headache and stress involved in calculating and maintaining your inventory tracker.
Even with the best formulas in place, using excel can lead to errors. It’s best practice to have a system in place to self-audit and update your numbers consistently.
You can download Finaloop’s free inventory tracking template to get you started.
If you aren’t sure what costs to include or you want more info on calculating your Shopify month-end inventory value, check out our blog on Fundamentals of Inventory Management: How to track your ecommerce inventory.
As your business grows, it’s important to reassess how you are tracking your inventory to determine if it's time to take your inventory management to the next level. You know you are ready for a next level tool if you find yourself with the following issues:
- You spend a lot of time maintaining and tracking your inventory
- You regularly run out of stock or have too much inventory spoilage
- You find it difficult to track your stock across multiple sales channels
Pros and cons of using a Google Sheet template
Inventory management system (IMS)
IMS is software that can help you manage various aspects of your inventory and supply chain by integrating across online stores, marketplaces, and warehouses to sync inventory updates in real-time.
For example, if you have 30 jars of strawberry jam in stock and you sell 2 jars on Amazon, your inventory count should reduce to 28 jars on both Shopify and Amazon.
There are lots of IMS out there each with its features, pros, and cons. The key is finding the one that checks off all the boxes on your wish list.
You can see a list of the IMS apps for your Shopify store most recommended by other Shopify sellers by checking out our blog on Top-Rated Inventory Management Systems for Your Shopify Store. There we discuss some of the highest rated inventory apps in Shopify, their key features, and costs so you can find the one that best fits your needs.
Here are our suggestions of key features to consider when choosing an IMS:
- Tracks all orders and order fulfillment details
- Sends alert when it's time to purchase new stock
- Accurately tracks the number of items you have at any given time
- Integrates with your warehouse, POS systems, website ecommerce tools, and other key apps
- Forecasts sales
- Allows customization of real-time reports
Pros and cons of using an IMS
Final thoughts on inventory management methods for your Shopify store
Having an inventory management process in place for your Shopify store is crucial to meet customer demands, prevent inventory waste, and manage your inventory costs. A good inventory management process will also help you properly account for your inventory costs and COGS so you can maintain accurate books - trust us, you will need this for making important business decisions, closing funding for your store, and filing your tax return.
Both tracking inventory through a Google Sheet and using an IMS have their pros and cons. Before embarking on one path, it's important to really assess your business needs and your financial constraints to choose the best fit for you. Even after you choose, you can (and should) periodically reassess the process to see if it's time for a change.
About Finaloop
We are a technology company providing automated end-to-end accounting service to ecommerce businesses. Our system connects to your apps, syncs all your data, and reconciles your books in real-time, replacing your bookkeeper. We offer reconciled books available 24/7, tax-saving insights, and a single place for all your financial data.
*The information provided on this website does not, and is not intended to, constitute legal advice. All information, content, and materials available on this site are for general informational purposes only. Readers are advised to consult with their attorney or accountant with any questions or concerns.*