Inventory control: Best practices, systems, and management

Inventory control is all about managing your products you sell. It's a balancing act of having what you need, when you need it, without wasting money. Doing this well makes your business more profitable and keeps customers happy.

To get good at inventory control, businesses use a variety of common methods. Practicing good inventory control also means predicting what customers will want and regularly checking your stock, in addition to having a good relationship with suppliers. 

Modern businesses use ERP software systems to help with inventory control. They automate tasks, give you up-to-the-minute information on what's in stock, and even connect with other parts of your business. 

According to our business solutions survey, the average respondent spent 25 hours a week on manual data entry. Utilizing a basic inventory software can drastically reduce this manual effort.

What is inventory control?

Key inventory management concepts

Why is inventory control important?

The 4 most common inventory management methods

8 inventory control techniques

The benefits of inventory control software

Boost productivity and enhance profitability

What is inventory control?

Inventory control is the organized process of accurately tracking inventory levels to guarantee your business always has the correct amount of product at the right time. 

Its core objective is to significantly boost profitability by minimizing inventory investment and the opportunity cost associated with excess stock, all while upholding high customer satisfaction.

Inventory control is a specialized subset of the overall field of inventory management. Whereas inventory management addresses the entire lifecycle of an organization's stock, inventory control focuses particularly on the efficient handling of stock that has been received and is now stored in your warehouse facilities.

Key inventory management concepts

Effective inventory management hinges on understanding several core principles that guide decision-making and optimize stock levels. 

1. Inventory categories 

Of the key principles of inventory management, understanding the different inventory categories is crucial for effective control and informed strategic decision-making. These categories describe the various stages and types of materials and products a business handles:

• Raw materials: These are the basic inputs you buy to create a product, like cotton, thread, or dyes for towels.
• Work-in-progress (WIP): This refers to goods that are partly finished but not yet ready for sale, such as towels that are sewn but still need labels.
• Finished goods: These are products that have completed the entire manufacturing process and are ready to sell, like packaged towels waiting for shipment.
• MRO (maintenance, repair, and operation) supplies: These are items vital for daily business operations but don't become part of the final product, such as machine lubricants, cleaning supplies, or office stationery.

2. Inventory control vs. inventory management 

It's important to understand the difference between inventory control and inventory management, even though people often use the terms interchangeably. They're related but focus on different things.

Inventory control is all about the stock you already have. It's the hands-on work of tracking, monitoring, and organizing items inside your warehouse. Its main goal is to avoid having too much or too little of the products you currently possess.

Inventory management is much broader, it’s what you will have. It covers the entire journey of your products, from purchasing them, storing them efficiently, and ultimately selling them for a profit. Inventory management's goal is to optimize the entire flow of goods to meet customer needs and achieve your business's overall objectives, aligning with initiatives like supply chain planning and efficient capital allocation.

3. The impact on cash flow 

Understanding how inventory impacts your cash flow is incredibly important for any business. Your inventory isn't just items in a warehouse, it's a significant financial commitment.

Inventory directly impacts your cash flow through inventory accounting, which is the system for valuing and recording changes in your stock on hand. This accounting process helps determine the true cost of goods sold and the value of your assets, directly influencing the financial picture of your business.

Here's how inventory impacts your cash balance:

• Inventory as a cash investment: Think of inventory as cash tied up. Whether it's raw materials, partially finished items, or products ready to sell, you've invested money in it. That money stays locked away until you sell those items and get paid.
• The cost of excessive inventory: Holding too much inventory is like freezing cash you could use elsewhere. Instead of funding payroll, marketing, or new tech, your money is sitting idle in unsold products. This limits your business's flexibility and slows down growth.

The aim is to balance your inventory stock. Have just enough inventory to meet customer needs without overstocking. This frees up cash, lowers costs, and improves your overall financial health, helping you run your business more smoothly.

4. The basic inventory formula 

When exploring key inventory management concepts, understanding the basic inventory formula is fundamental. This simple yet powerful equation helps businesses track their inventory levels and plan for future needs.

Let's break it down with a simple example to illustrate how this formula helps maintain sufficient items and plan for purchases:

Imagine a company sells a popular smart home device.

• Beginning inventory: At the start of June, Company A had 100 smart home devices in stock.
• Purchases: During June, they ordered and received 250 new smart home devices from their supplier.
• Sales: By the end of June, they had sold 200 smart home devices to customers.

Using the ending inventory formula:

Beginning Inventory + Purchases − Sales = Ending Inventory

We can calculate that:

100 + 250 - 200 = 150 ending inventory 

So, Company A has 150 smart home devices left in stock at the end of June.

This formula is crucial because it allows businesses to:

• Track stock: Accurately know how much product they have at any given time.
• Plan purchases: By knowing their ending inventory and anticipated sales for the next period, they can strategically plan how many new items they need to purchase to avoid stockouts or overstocking.

Why is inventory control important? 

Having a good inventory control system is key to a successful business. It helps you keep products in stock, which means happier customers and more sales. This way, you don't miss out on sales just because you didn't have something on hand. 

It also helps you avoid expensive problems like having too much or too little stock. Too much inventory ties up your money and can lead to wasted goods. Too little means lost sales and unhappy customers. Finding the right balance with inventory control saves you money and boosts your profits.

The value of maintaining the right stock levels

Inventory control makes your entire supply chain run more efficiently, leading to supply chain optimization. It means quicker order processing, better warehouse organization, and seamless teamwork between your suppliers and distributors. This leads to fewer delays and faster deliveries. By not having too much cash tied up in inventory, you free up money to grow your business or cover other important costs, making your company financially stronger.

The 4 most common inventory management methods

Businesses employ various strategies to effectively manage their stock and optimize operations. The following are the four most common inventory management methods, each offering a distinct approach.

1. Manual inventory tracking 

Best for: small businesses or startups that handle a limited number of items

Manual inventory tracking stands as the simplest and most traditional method. This technique typically involves an inventory control specialist using physical ledgers, notebooks, or basic spreadsheets to record inventory ins and outs. Here, the volume and complexity of inventory do not yet warrant more sophisticated systems.

But this simplicity comes with big downsides. It's a lot of work, demanding constant updates that eat up your time. It's incredibly hard to get useful insights for forecasting purposes. Plus, it's very easy for people to make mistakes, leading to wrong counts and problems across your sales, purchasing, and financial records.

2. Stock cards

Best for: highly specialized or unique items

Stock cards are a more organized way to track inventory than just using a simple list. With this method, you have a separate card for every unique product you sell.

Each card keeps a dedicated record for that item. It'll show details like its unit price, sales price, and how many you currently have in stock. You update these cards every time something happens, like when you buy more, when you sell some, or when customers return items. For stock cards to work well and give you accurate numbers, you must update them consistently with every single product movement. 

3. Simple spreadsheets

Best for: basic tracking of specific, non-critical items

Many small businesses use simple spreadsheets (like Excel) to track inventory electronically instead of paper ledgers. You can customize them to record product names, quantities, costs, sales, and more.

However, even though they're digital, you usually have to manually update every purchase, sale, or return unless you build complex automated tools. Because of this constant manual entry, spreadsheets are still largely seen as a "manual" way to manage inventory. How well they work really depends on how careful and consistent the person entering the data is.

4. Basic inventory software 

Best for: growing small and mid-size businesses

Basic inventory software is a big upgrade from manual tracking, moving you towards automation. These programs often seamlessly integrate with your existing business and financial software solutions, like Intuit enterprise solutions, for smoother operations.

The benefits are huge—you get real-time updates on your stock, so you always know what you have. The software also provides reports and analysis, helping you compare costs, see what's selling well (or not), and even automatically suggest when to reorder. Plus, it's built to grow with your business, making it perfect as your inventory gets bigger and more complex.

8 inventory control techniques 

Effectively managing your stock requires specific strategies. Here are eight common inventory control techniques that businesses use to optimize their inventory levels and streamline operations:

1. FIFO and LIFO (valuation methods) 

FIFO (First-In, First-Out) and LIFO (Last-In, First-Out) are ways businesses account for which inventory they've sold.

• FIFO assumes you sell your oldest items first.
• LIFO assumes you sell your newest items first.

These methods are crucial for two reasons: figuring out the value of your remaining inventory and calculating your cost of goods sold (COGS). The method you choose can really change your reported profits and the value of your inventory, especially when prices are going up or down. For example, during inflation, FIFO usually makes profits look higher, while LIFO makes them look lower.

2. Min-Max inventory control 

Min-max inventory control is a simple way to manage stock. You set a lowest point (minimum) and a highest point (maximum) for each item. When stock hits the minimum, you automatically reorder just enough to get back to the maximum.

• For example, if your minimum is 50 and maximum is 200, hitting 50 means you order 150 more. This system aims to keep stock levels balanced.

However, this method can be too rigid. Because the levels are fixed, you might end up with too much or too little stock if demand suddenly changes or there are supply problems. This could mean lost sales or higher storage costs.

3. Just-in-time (JIT) inventory 

Just-in-time (JIT) inventory is a smart way to manage stock where you only get materials from suppliers exactly when you need them for production or sale, not before. This lean method cuts down on waste, preventing inventory from sitting around, tying up money, or taking up valuable storage space.

A huge perk of JIT is saving money on inventory costs. Since products are only on hand when immediately needed, you spend less on storage, reduce the chance of items becoming old or useless, and free up cash that would otherwise be stuck in unsold goods. This improves business efficiency and saves money overall.

However, JIT has a big risk: if your suppliers aren't reliable, you could easily run out of stock, which stops production processes or sales and makes customers unhappy. 

To avoid this, it's super important to build strong, trusting relationships with your suppliers. They need to consistently deliver on time and meet quality standards to keep your supply chain running smoothly.

4. Two- or three-bin system 

The two- or three-bin system is a simple and visual way to manage small, commonly used items. You simply put one product into two (or three) separate containers.

Here's how it works: you use items from the first bin until it's empty. Then, you start using the second bin, which acts as your backup. When you start the second bin, that's your signal to reorder more. If there's a third bin, it's usually a last-resort emergency supply.

While easy and cheap, this system has limits. It's not great for large amounts of inventory, expensive items, or products whose demand changes a lot. It doesn't give you exact, real-time stock numbers, and it lacks the detailed data you need for advanced planning.

5. Fixed order quantity 

Fixed order quantity means you always order the exact same amount of an item whenever you need to restock. This set amount is usually chosen to be the most cost-effective.

This method helps avoid ordering mistakes and keeps your storage predictable since every incoming shipment is the same size. It also cuts down on extra costs from varied shipping and handling.

Often, these systems work with automatic reorder points. When stock hits a certain low level, an order for that fixed quantity is automatically placed. This makes restocking smoother and more consistent, needing less hands-on management.

6. Fixed period ordering 

Fixed period ordering means you order more stock at regular, set times (like every Monday or once a month), no matter how much you currently have. The focus is on when you order, not on a specific low stock level.

With this method, the amount you order will change each time. At each scheduled ordering moment, you check your current stock and calculate how much you need to buy to reach your desired level, keeping future demand in mind. This flexible quantity helps handle changes in customer demand.

This approach is good for items from the same supplier, potentially saving on shipping. But, you need good predictions for future sales, because if you guess wrong, you could run out of stock or have too much.

7. Vendor-managed inventory (VMI) 

Vendor-managed inventory (VMI) is when your supplier (vendor) takes charge of managing and refilling your stock for certain products. Instead of you placing orders, they watch your inventory, predict what you'll need, and then send the right amount of product at the right time. This frees you from inventory planning, as the supplier often knows best about their product's availability.

For VMI to work, you need to trust your vendor and share your sales and inventory data with them. You benefit from less paperwork, fewer stockouts, and better inventory levels. The vendor gets clearer insights into demand, more consistent orders, and a stronger relationship with you.

8. Set par levels (and safety stock) 

Setting par levels means you decide on a minimum amount of each product you want to keep in stock. When your inventory drops below this level, your system tells you it's time to reorder, helping you avoid running out.

These par levels aren't fixed—they change for different products based on how fast they sell, how long it takes to restock, and even seasonal changes. You need to research and regularly adjust them. Often, you'll also keep a bit of safety stock (extra inventory) just in case sales spike or deliveries are delayed.

Using par levels makes ordering more efficient and flexible, and can lower storage costs. But there are downsides—set them too low, and you risk running out of stock. Set them too high, and you tie up too much cash. Ordering small amounts regularly might also miss out on bulk discounts. So, finding the right balance is key.

The benefits of inventory control software

Using dedicated inventory control software is a huge step forward for businesses. It takes you beyond manual headaches, boosting your operations and profits significantly. This software makes everything more efficient by automating tracking, reporting, and analysis, which directly leads to more profits. 

Increased profit potential

By keeping stock levels just right and cutting waste, you turn inventory into money faster and keep cash from being tied up. A key benefit is almost never running out of stock, meaning you always have products available, preventing lost sales and unhappy customers.

Saved time

Beyond just profits, inventory software makes daily tasks much easier with things like barcode tracking. This speeds up getting new items in, picking orders, and shipping them out. It also virtually eliminates inventory write-offs because you know exactly what you have, reducing losses from missing or expired stock. Plus, audits become fast and easy, saving your team a lot of time.

More system flexibility 

Inventory control software really shines because it's so flexible. Unlike old-school methods or simple spreadsheets, this software can easily adjust to different types of businesses, changing customer needs, and complicated supply chains.

Here's how that flexibility helps:

• Works everywhere: It can manage inventory in many different places at once.
• Plays well with others: It connects with your other business tools like accounting or online stores.
• Grows with you: As your business gets bigger, the software can handle it without a hitch.

This adaptability means your business can quickly react to market shifts, unexpected problems, or new opportunities. For example, if you start selling on a new platform, the software can instantly update your inventory, so you don't sell something you don't have. If you add new products or warehouses, the system handles the extra work easily.

Boost productivity and enhance profitability

Effective inventory control is the backbone of operational efficiency and financial health for any business handling physical goods. By implementing best practices and leveraging a dedicated enterprise financial management solution like Intuit Enterprise Suite, companies can optimize stock levels, reduce costs, and consistently meet customer demand. Mastering inventory control ultimately translates into a more resilient, profitable, and customer-centric business.