Whether you’re just starting your small business journey, or you’re looking for better ways to run your company, you’ve probably asked this question: “How can I track my inventory?”
That’s a great question — but, are you sure that’s what you really want? Because the difference between tracking inventory and managing inventory is absolutely crucial to the future of your business.
While many people use these terms interchangeably, for the sake of getting to the heart of this discussion, let’s differentiate between “tracking” and “managing” inventory. After all, these two very different ways of dealing with inventory have ramifications for your business’ future growth.
Here are a few key characteristics of and differences between tracking and managing inventory:
- Tracking inventory is all about seeing quantities.
- Tracking inventory doesn’t provide any meaningful information about inventory cost.
- Tracking inventory usually provides a “sum cost,” which is generated by whatever number you input into your system and does not reflect the actual, or “physical,” cost of inventory.
- Managing inventory allows you to see your inventory cost stack and cost layers.
- Managing inventory provides in-depth information regarding cost, individual sales transactions, sales trends and more, which are necessary for forecasting future growth.
Essentially, tracking inventory answers the high-level question, “How much of (insert product here) do I have?” Or, simply put, “What are my quantities?”
This question (or ones similar) usually comes up for small businesses using some sort of point-of-sale (POS) technology. Most POS software providers include “tracking” and/or “managing” inventory in their list of capabilities. But, in reality, most POS software for small businesses is pretty limited in inventory capabilities, only tracking what inventory quantities are in stock.
“Many systems don’t do a very good job of recording the cost of that inventory, of being able to replenish that inventory — all of those other pieces that are associated with managing your inventory,” said Jacob Pegg, Director of Product Development at SalesPad.
Pegg has worked with a lot of small businesses running POS systems that only handle tracking inventory quantities. He says that this can significantly hinder a company’s ability to have real visibility into their inventory.
Tracking inventory gives you an item’s “sum” cost.
When using a system that only tracks inventory, the cost of each item is usually a static field that a user can then enter a price into. Therefore, in most typical POS systems, the “cost” of an item doesn’t reflect any sort of information about how much that item actually cost you — cost is simply what you determine it to be.
Many ecommerce and POS systems don’t manage the cost of inventory because those systems typically have no purchasing or receiving functionality. That means there’s no way to automatically manage the changing cost of bringing in your regular inventory items because your system only tracks quantities. This can cause inventory hangups and gross cost miscalculations.
Managing inventory shows you cost stacks.
However, using a system to manage inventory provides cost stack visibility — which is key for making business decisions based on inventory costs and actual profit.
Most POS software doesn’t have the capability to use different valuation methods (LIFO, FIFO, etc.), and therefore doesn’t offer visibility into the cost stack of an item.
The cost stack of an item is the total of the different cost layers associated with inventory (for example, the different FIFO layers associated units of inventory purchased at a certain cost).
Every time a business brings inventory in, there’s a unique cost associated with that inventory quantity — and if you’re not able to see and record the individual layers of cost, you’ll have no way to see the actual cost and profit of individual sales as layers of the cost stack are peeled back.
“When you’re just tracking inventory, you either have no cost stack or the system flattens the cost stack and just averages the cost. So, you’re not really getting the true benefits of managing that inventory,” Pegg says. “It doesn’t matter what you ultimately sell an item for, because there’s no way of knowing if you actually made money or not.”
Where does your business fall?
Simply tracking inventory is just fine for some businesses. However, these key distinctions between tracking inventory and managing inventory can spell growing or plateauing for sales and profits.
Managing inventory carries with it a slew of insights regarding sales trends, best-selling items, inventory costs, and every individual sales transaction. Additionally, that kind of insight into your business can usually only be attained when your inventory management system is connected to your accounting system. Disconnected systems will not (easily and painlessly) give you the insight you’re looking for.
While tracking may work for certain kinds of businesses (such as newer businesses or smaller boutique-style retail operations), if you want to grow, you’ll need to see inside the true cost of your inventory — and you can only do that by managing your inventory.
At the end of the day, determining between tracking and managing inventory is a question of growth — are you ready to take your business to the next level?