📦 How Should Small Business Owners Track Inventory? A Practical Guide 🎯
Not tracking inventory is like realizing you're out of toilet paper right when you need it the most. 🚽😱 Keeping an eye on your stock prevents shortages, reduces waste, and keeps your finances on point. But how often should you check? And what’s the best way to do it for your industry? Let’s dive in! 🚀
🕵️♂️ How Often Should You Track Inventory?
The answer depends on what you sell and how quickly you sell it. Here are a few suggestions for different types of businesses:
You should perform daily spot-checks of perishable items (meats, cheeses, produce) before they turn into science experiments. 🦠
Weekly: Count essential ingredients & non-perishables to avoid “we’re out of ketchup” emergencies. 🍅
Monthly: Full audit to balance the books and plan orders like a pro. 💰
You can do daily checks of shampoos, conditioners and styling tools—nobody likes a salon running out of hairspray! 💨
Make sure to keep an eye on high-turnover products weekly.
Monthly: Deep dive into stock levels for budgeting & restocking.
You can perform daily spot-checks for bestsellers (snacks, drinks, essentials). 🍫🥤
Weekly: Stock counts to prevent surprise shortages.
Monthly/Quarterly: Full audit to catch sneaky trends in sales. 📊
Weekly: Check tools, hardware, and supplies—missing a drill at the wrong time is NOT fun. 🛠️
As Needed: Special-order items should be tracked.
Monthly: Review stock to prepare for future projects.
Daily: Track detergents, waxes, and towels so you don’t run out mid-shine. ✨
Weekly: Monitor usage to help keep your expenses in check (and lower your Cost of Goods Sold).
Real-Time: You can and should automate inventory management using an e-commerce platform like Shopify or Medusa.js (seriously, it’s a game-changer). ⚙️
Try to perform a monthly/quarterly audit to avoid overselling and/or stockouts.
🏗️ Home Renovation Businesses
Job materials including lumber, tiles and fixtures can be counted before and after projects to determine how much was used. This will help you determine the true profitability of that job. 🏡
Weekly supply counts can help you prevent work delays.
Monthly audits can identify surpluses and shortages.
📊 Which Inventory Tracking Method is Right for You?
There’s more than one way to keep track of your inventory. Picking the right method can save you time, money, and headaches!
✏️ Manual Tracking (Spreadsheets or Paper Logs)
Manual tracking is best for small businesses with simple inventory, but requires frequent updates & manual data entry, which can become difficult to manage as your business grows. When it does, consider purchasing dedicated inventory management software.
🌐 Additional Inventory Software (Beyond QuickBooks)
QuickBooks is great, but there are plenty of other options tailored to different business sizes and industries:
Square for Retail – Best for small businesses with POS integration.
Zoho Inventory – Affordable, cloud-based, and ideal for scaling businesses.
TradeGecko (now QuickBooks Commerce) – Great for multi-channel sellers.
MarketMan – Perfect for restaurants needing supplier automation.
Lightspeed – Advanced features for retail businesses with multiple locations.
Shopify
Pro Tip - Some inventory software synchronizes better with QuickBooks than others. Typically, manual journal entries are recommended for importing data from your inventory software into QuickBooks, however there are some cases where accounts can be mapped correctly, with effort and consideration.
📊 FIFO vs. LIFO: How Does Your Inventory Impact Your Financials?
How you track and manage your inventory actually affects your profitability, taxes, and financial statements. Here’s what you need to know:
⭐ FIFO (First In, First Out) – The Common & Conservative Choice
This inventory tracking method assumes that you sell your oldest inventory first.
Best for: Businesses with perishable goods (restaurants, food retailers) or products that become obsolete over time (tech, fashion).
During inflation, FIFO shows higher profits since older, cheaper inventory is recorded as COGS.
Balance Sheet Effect: Ending inventory is recorded at higher (newer) costs, making assets look stronger.
Tax Impact: Higher profits mean higher taxable income.
🌟 LIFO (Last In, First Out) – The Tax-Saving Strategy
This inventory tracking method assumes that you sell your newest inventory first.
Best for: Businesses with rising costs (manufacturers, auto retailers, wholesalers) who want to reduce taxable income.
During inflation, LIFO results in lower profits because newer, more expensive inventory is counted in COGS.
Balance Sheet Effect: Ending inventory appears lower (older, cheaper costs), making assets look smaller.
Tax Impact: Lower profits mean lower taxable income.
IRS Note: If you use LIFO, you must file Form 970 and stick with it consistently.
📈 How Inventory Affects Your Balance Sheet & Profit & Loss Statement (P&L)
Inventory isn’t just about dusty old parts sitting in a warehouse—it’s a current asset and plays a major role in your financial health:
Balance Sheet Impact: Inventory is recorded as a current asset, so the valuation method (FIFO/LIFO) affects your total assets and financial ratios.
Cash Flow: Overordering isn't good because it ties up your cash in excess inventory. Underordering can lead to lost sales.
Shrinkage (Theft, Damage, Miscounts): When you reduce losses from theft, damage and miscounts, your profitability and asset valuation will improve. Consider getting locks and/or security cameras for securing high value or desirable inventory items.
IRS Requirements: Businesses using accrual accounting must report inventory on their tax forms under "Merchandise Inventory".
COGS (Cost of Goods Sold): Your inventory method will affect your gross profit and taxable income.
If you want higher profits and a stronger balance sheet, FIFO is usually better.
If you want to reduce taxable income during inflation, LIFO might be a smarter choice.
♻️ Lean Six Sigma & Inventory Efficiency
If you want to improve your efficiency, consider using Lean Six Sigma principles to reduce waste and streamline your inventory ordering process:
✅ Just-in-Time (JIT) Inventory
Try to order stock only when you need it to reduce your inventory storage costs. You might even be able to use a smaller building!
Risk: Supplier delays can halt production, so always have a back up supplier in mind! Commercial aircraft can have over 6 million parts, and modern cars use 30,000+ components—if even one critical part is delayed, the entire production line can grind to a halt. Smart manufacturers secure multiple suppliers to avoid costly disruptions. Take a page from their playbook and diversify your supply chain! 🚗✈️
Use historical data and seasonal trends to predict how much material/stock needs to be ordered in the coming months.
Implement a minimum safety stock level to buffer against customer demand fluctuations.
🔄 Continuous Improvement (Kaizen)
Regularly review stock movement and adjust your ordering patterns.
Train employees on inventory best practices to prevent errors.
Develop a method to keep your inventory physically organized.
📚 Bookkeeping Best Practices for Inventory
Want your financial records to be as spotless as your inventory shelves? Follow these golden rules:
✔ Enter transactions ASAP – Don’t let missing numbers distort your reports. 📝
✔ Use the right valuation method – FIFO, LIFO, or weighted average—pick the best fit for your business. ⚖️
✔ Reconcile inventory regularly – Compare physical counts to records to catch errors early. 🧐
✔ Monitor COGS (Cost of Goods Sold) – Helps with pricing & financial planning. 💵
The best inventory tracking method is one that keeps your business running smoothly without eating up your time. If you’re just starting out, manual tracking works fine. But as you grow, automated tools and lean inventory strategies will be lifesavers.
Find the right balance, track consistently, and you’ll keep your business stocked, profitable, and stress-free!
🚨 Disclaimer: This is NOT legal or tax advice—always consult with a professional💼