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Understand inventory management

Inventory is the goods and materials a business buys, makes or manufactures to sell or exchange. It’s also known as trading stock.

Inventory management is the way you organise, track and control the stock in your business. It shows you:

  • what stock you have on hand
  • what you need to order
  • when you need to restock.

Keep good inventory records. This will help you know what’s selling (and what isn’t) and find ways to cut costs and boost sales. It’ll also help you meet your tax obligations and make end-of-year reporting easier.

Review and update your inventory regularly to avoid costly errors and make better decisions for your business.

Types of inventory

Inventory types are the different stages stock moves through before it’s sold. Knowing these helps you track what you have and what you need, which makes planning easier.

There are 3 main inventory types (some industries use more):

  • Raw materials – items you use to create your products, such as rolls of fabric for making clothing.
  • Work in progress – products you’re currently making, such as half-assembled office chairs on the factory floor.
  • Finished goods – products that are ready to sell, such as boxed and labelled office chairs ready for delivery.

1. Choose a tracking system

An inventory tracking system reduces waste and prevents stock shortages.

You can use a:

  • periodic system – count stock by hand and manually update your records using a spreadsheet or paper records.
  • perpetual system – use software or a point-of-sale system (POS) that automatically updates your records every time you buy or sell something.

Choose a system that can grow with your business and is easy to use. Before you decide, test out a few options or get professional help.

Record each sale and return

Make sure you capture every sale and return in your records. If you use a periodic system, remember to update your records each time you make a sale or process a return.

Keeping up-to-date records makes stocktake easier and helps you:

  • see patterns over time, like which days or months are busiest, or if customers return a product often
  • catch issues as they happen, like errors or faulty products
  • reorder popular items before you run out and avoid over-ordering products that sell slowly.

2. List all inventory

After you choose a tracking system, list all the products or materials you stock. This gives you a clear starting point for managing your inventory.

Include details like:

  • product name or code
  • description
  • quantity
  • supplier information
  • cost and selling price.

Sort your inventory into categories

Organise your inventory by grouping similar items together. You can sort by:

  • product type. For example, ergonomic chairs and standard chairs supplier
  • location, such as warehouse or retail shop
  • inventory type (raw materials, work-in-progress or finished goods).

Sorting your inventory makes it easier to find items, track trends and manage your stock.

3. Set reorder points

A reorder point is the smallest amount of each item you want to have in stock before you order more.

Setting reorder points means you don’t need to guess when to order. You’ll know exactly when it’s time to restock, which saves you time and helps you keep your customers happy.

Some inventory management tools automatically set reorder points for you. They alert you when stock is low and some reorder the stock for you.

How to manually set your reorder points:

  • Work out how many items you usually sell in a week or month.
  • Check how long it takes for new stock to arrive.
  • Think about busy times of year, supplier reliability and upcoming sales.
  • Set a reminder in your system or calendar for when your stock reaches the reorder point.

Example

If you sell 10 chairs a week and delivery takes 2 weeks, set your reorder point at 20 chairs. When your stock drops to 20, it’s time to order more.

4. Do regular stocktakes

Complete a stocktake regularly. Most businesses do them monthly or quarterly.

A stocktake is a physical count of your stock. It shows if the items you have on hand match your inventory record.

A stocktake helps you:

  • spot missing or stolen items early
  • find items that are broken, out of date or can’t be sold
  • get ready for sales, audits or moving your business
  • support insurance claims
  • manage stock levels to avoid overstocking or running short
  • use your space better by rearranging stock to highlight top-selling items and ensure easy access.

You may also need to do a stocktake for tax purposes. Check the rules on the Australian Taxation Office website.

5. Review stocktake results

Regularly reviewing your stocktake results helps you analyse your sales, spot patterns and identify issues early.

Compare your current and last stocktake numbers with your sales records. This will show you which items:

  • sell quickly after you repurchase them
  • haven’t sold any units
  • are essential to your business.

Use the findings to make smarter buying decisions and keep stock levels right for your business. For example:

  • order more of your bestsellers
  • run a sale on slow-moving items
  • retire stock that’s not selling well
  • remove outdated stock, such as expired products or ended lines.

Update your inventory records after making changes so your next stocktake is correct.

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