How to Set Up an Inventory System

Setting up an inventory system can help business owners and managers control each step in the inventory management process. Inventory is quite often the second largest expense for a company behind the employee payroll. Coordinating each task and activity ensures companies complete inventory functions in a consistent manner. While standard inventory processes exist in the business environment, business owners and managers can create a system that is unique to their operations.

Things You'll Need

• Inventory
• Accounting or business software
• Storage space
• Internal inventory paperwork
• Bar code system

Instructions

1. Use a computerized inventory management system. While companies can use a manual inventory process, computers and business software greatly enhance the inventory system. Even basic computer spreadsheets or pivot table reports can improve this process.

2. Create a master inventory list. A master inventory list contains information relating to item numbers, product name, color, options, vendor name and vendor manufacturing number. This information helps companies maintain an accurate list of all products sold to consumers.

3. Install a barcode system. Inventory barcode systems can work with, or independent of, regular business software applications and programs. Barcode systems allow companies to process information electronically in the company and makes tracking products easier than a manual system.

4. Choose an accounting method. Companies must properly account for all inventories in their business. The periodic method requires companies to update their general ledger on a monthly or quarterly basis. Perpetual inventory systems update the books after each purchase, sale or adjustment to inventory.

5. Implement internal controls. Internal controls are specific guidelines owners, managers and employees must follow when working with the company’s inventory. Controls can relate to using authorized purchase orders, restricting access to inventory and separating duties among employees.

Tips & Warnings

• Counting inventory can help companies reconcile their accounting ledgers to physical inventory on hand. This also ensures that all inventory is in working order and available for sale.

• Failing to properly control inventory can quickly increase operating costs. Not only do companies need to replace lost, stolen or obsolete inventory, but they also need to fire employees for abusing the system or create new internal inventory controls, with both being a time-consuming process.

References

• Google Books: Inventory Management: Principles, Concepts and Techniques
• Small Business Administration: Inventory Management