Guide to Inventory Management

Inventory management is crucial in optimising the management of your orders, stock, deliveries, and sales. Without inventory management, companies have to manually track inventory. In this digital age, entrepreneurs must future-proof their businesses by adopting tech solutions. This allows them to dedicate manpower towards other aspects of the business.

Yet, inventory management isn’t just about technology, it’s about knowing what stock you have, where it is, and what it’s doing for your bottom line. In South Africa, where small businesses often operate on thin margins, managing your inventory with precision can be the difference between growth and stagnation.

This guide explores what inventory management is, how it applies specifically to South African SMEs, and how to approach it in a way that supports business growth and operational efficiency.

Inventory management is the systematic approach to ordering, storing, using, and selling a company’s inventory, whether it’s raw materials, components, or finished products.

Let’s break it down practically. Imagine you’re running a local spaza shop. You stock basics: maize meal, sugar, soft drinks, airtime vouchers. Without an accurate system, you don’t know when the bread is expiring or how many crates of drinks you’ve already paid for.

Once your business demands growth, tracking manually will hold you back. Inventory management optimises your product management by giving you a bird’s-eye view of all that stock, what’s moving, what’s sitting, and what needs urgent attention.

Inventory issues include hidden stock losses, cash tied up in dead stock, and poor forecasting. If your money is sitting in unsold stock, it’s not circulating in your business.

Poor inventory management also creates compliance problems. VAT submissions to SARS require accurate inventory tracking. You can’t submit accurate financials without understanding your cost of goods sold (COGS), and without inventory records, your accounting is flawed from the start.

Inventory and Compliance with SARS

Accurate inventory records are essential for financial reporting and VAT compliance. SARS requires businesses to submit financials that reflect the true cost of sales, which is only possible if your inventory movements are accurately tracked.

If you don’t know what’s coming in or going out, you can’t:

• Accurately calculate Cost of Goods Sold (COGS).
• File precise VAT returns.
• Justify tax deductions on inventory losses.

Poor records could result in audits, penalties, or overpaying taxes, all of which directly impact your bottom line.

It’s crucial for SMEs to have a good understanding of VAT. That way, you can ensure you’re fully compliant. To file accurate VAT returns using inventory management software, do the following:

1. Track All Stock Movements Accurately

Your VAT return depends on correct recording of:

• Purchases (input VAT): VAT you paid when buying stock or raw materials.
• Sales (output VAT): VAT you charged customers on sold goods.

2. Reconcile Inventory with VAT Invoices

Use your inventory management system to match each item purchased or sold with its corresponding VAT invoice. This ensures:

• You only claim VAT on valid purchases (with tax invoices).
• You declare VAT only on what was actually sold.

3. Calculate Cost of Goods Sold (COGS) Correctly

COGS affects your net income, which in turn affects the profit you report to SARS. Inventory management systems help you: Businesses can use two methods to calculate COGS. There’s one for manufacturers and another for retail.

Calculations Used for Manufacturing:

Businesses in the manufacturing field might find it complex to calculate COGS due to the intricate nature of their supply chains. Unlike retailers who primarily deal with finished goods, manufacturers must account for various stages of production, each incurring distinct costs. This often involves tracking raw materials from procurement, through work-in-progress, and finally to finished goods inventory.

Other aspects include raw materials, which are the direct materials used in producing goods, manufacturing costs encompassing all expenses incurred during production, storage costs associated with holding inventory, and freight costs like shipping costs for incoming materials or final product delivery.

For those using accounting software like Xero, the Cost of Goods Sold (COGS) can be located within the Profit and Loss (P&L) sections of their financial statements.

Calculations Used for Retail:

Calculations for retail are much easier due to the direct nature of their sales. Unlike manufacturers, retailers typically purchase finished goods from suppliers and then sell them to end-users without significant transformation. This simplifies the COGS calculation, as it primarily involves tracking the cost of acquiring the inventory.

There’s no one-size-fits-all. The system you use depends on your business’s complexity, budget, and growth stage. Here are the common systems:

1. Manual Systems: Still widely used, especially by informal or early-stage SMEs. This involves writing down stock levels on paper or whiteboards. It’s cost-effective but prone to error and theft.

2. Spreadsheet-Based Systems: Many businesses use Excel or Google Sheets to track inventory. While better than paper, it’s still manual, time-consuming, and offers no real-time updates.

3. Cloud-Based Inventory Management Software: Tools like Zoho and Sage allow SMEs to access inventory data from any device. These platforms are scalable and affordable.

4. ERP Systems: Enterprise Resource Planning (ERP) systems like SAP Business are full-suite solutions that integrate inventory, finance, HR, and procurement. These are best suited for medium-sized manufacturers or exporters.

Once you’ve selected a system, how you manage inventory day-to-day becomes your competitive edge. The following techniques are globally recognised and locally relevant:

1. FIFO (First-In, First-Out): Used by grocery stores and pharmacies, this method ensures that older stock is sold first. It reduces losses due to expiration.

2. LIFO (Last-In, First-Out): Less common in South Africa but still used in fast-moving consumer goods when storage space is limited. Not ideal for perishable goods.

3. Just-In-Time (JIT): Ideal for manufacturers or drop shippers. Inventory arrives “just in time” to fulfil orders. Risky during load shedding or port delays.

4. ABC Analysis: Inventory is categorised as A (high-value, low-quantity), B (moderate value), and C (low-value, high-quantity). This helps focus attention on the most impactful stock.

Benefits of Inventory Management Software

Software is beyond the point of being a luxury, it’s now a necessity to not only help you scale, but optimize your business operations. Here’s what it unlocks:

1. Reduces Human Error: Manual counts are prone to mistakes. Software ensures consistency.
2. Improve Cash Flow: When you know what stock moves fast, you can stop over-ordering slow movers.
3. Real-Time Data: Modern platforms sync across devices, letting you track stock on the go.
4. Multichannel Integration: Tools like Sage and Zoho integrate with Shopify, and Takealot. That means one central inventory, even across multiple platforms.
5. Supplier & Reorder Management: Automated low-stock alerts, reorder points, and supplier history all reduce guesswork.

Limitations of Inventory Software

Inventory software has its perks, but it does come with its challenges:

1. Upfront Costs: If you’re a small business on a tight budget, it may seem expensive to micro-enterprises.
2. Learning Curve: Many entrepreneurs shy away from software due to fear or lack of training.
3. Digital Divide: In rural areas or informal economies, poor internet access limits cloud-based solutions.
4. Customisation Gaps: Some generic tools don’t understand local needs like VAT codes or multiple currencies. This problem is especially evident if you’re using international platforms.

Choosing an inventory management system can be tricky, but it doesn’t have to be. Here’s a simple checklist SMEs can follow when considering inventory management system:

1. Business Size: SMEs should consider cloud software. The plan you choose will be dependent on the size of your business.
2. Budget: Balance affordability with functionality. Look for free versions or start by testing out the most affordable plan.
3. Integration: Do you sell on Instagram, WhatsApp, and Takealot? Choose tools that sync across channels.
4. Industry Fit: Look at tools that cater to your industry. For instance, if you’re in retail, consider using a point-of-sale system like shopify.
5. Local Support: Ensure you opt for tools that offer South African customer support or training.

If you’d like a simple approach to inventory management. Do the following:

1. List All Your Stock: Write down what you sell, how much you have, and how much it costs.
2. Choose a Digital Tool: Use Zoho inventory, or any free inventory app.
3. Add Your Stock to the Tool: Type your stock list into the app or upload from Excel.
4. Give Each Item a Code: Label items with a barcode or unique number to track them easily.
5. Record Sales and Purchases: Update your stock every time you sell or buy something.
6. Set Low-Stock Alerts: Let the system remind you when you need to restock.
7. Link to Your Sales Channels: Connect your inventory to your online shop or POS system.
8. Track from Anywhere: Use cloud-based apps so you can check stock on multiple devices.
9. Teach Your Team: Show your staff how to use the system to avoid mistakes.
10. Review Monthly: Check your stock levels and sales reports every month.