Effective inventory management is one of the keys to running a profitable business, and yet it amazes me how out of touch some business owners can be about the flow of products in and out of their companies.

Inventory management is all about balance and flexibility. If you buy too much inventory, too often, then it can eat up your working capital and erode profits: capital is tied up in your unsold items, warehousing can get expensive and inventory that sits too long on a shelf is subject to damage, depreciation, and obsolescence. On the other hand, you don’t want to start running out of your most popular items. At the very least, you may lose those particular sales, at the worst, you’ll loose customers.

That said, here are four aspects of good inventory management that all small business owners should follow:

1. Conducting inventory projections.  Start with some decent projections of how much supply you’ll need and when you’ll need it. The best gauge is what you’ve sold in the past. If you’ve sold 100 items per month for the past 12 months, chances are that you’ll need 100 this month. Then there’s seasonality: Do you usually see a fourth quarter spike with holiday sales? Or, if you’re in the home and garden business, do you see more activity in the spring selling season? 

2. Set up a good system to track inventory. If you are dealing with a lot of inventory then you shouldn’t be relying on an Excel spreadsheet. Using electronic data interchange (EDI) and bar code scanning can help eliminate the data entry errors that can happen during receiving and during order fulfillment. They can also alert you to instances of theft. But, that’s not enough. You should also make it a point to spot test your inventory counts. This practice, called “cycle counting,” involves choosing a few items a week and comparing the inventory record to the actual count. Any best selling items should get counted more often.

3. Get the right tools in place. Aside from the scanning tools mentioned above you can use accounting software suites such as Quickbooks or Peachtree to both track and get a dollar value for your inventory and have all of this information in one central database. If you are running a retail operation, there are Point of Sale (POS) Systems, such as AccuPos, that work directly with Quickbooks and Peachtree. Alternatively, you can opt for a separate POS system, such as Shopkeep.com.

4. Back it Up. Unless you are using a cloud-based inventory management system, you need to backup any inventory data. Your backup plan can simply consist of saving critical inventory data to a removable thumb drive. You could also use online backup services, such as Symantec.

5. Set up Clear Policies. When it comes to inventory management, you can have the best equipment and set up in place, but if no one follows company procedures, then it will all be worth nothing. Thus, you need try to come up with inventory policies and procedures and then make an effort to ensure that your employees are following them. For example, what happens to a returned product that cannot be returned to the shelf? How is it recorded?