Inventory tracking is something that is confusing to many new entrepreneurs. Many of the women I have talked to that have home- based businesses which deal with inventory don't really understand the importance of inventory tracking. At first it is a little confusing and it may seem like a waste of time, but over the long-run, inventory tracking is vital to any business that deals with inventory.

When you understand the importance of inventory tracking, you will recognize the benefits of it and that will make it seem more worthy of your time. In big businesses, with lots of employees, inventory tracking is essential to accurately calculating the cost of good sold and identifying problems with profit margins. Waste of perishable inventory and loss of inventory to theft becomes pretty evident when profit margins drop drastically. Inventory tracking is the technique that brings problems like these to light.

In a small internet business, especially an owner-operated business that has no employees, people don't always see the value of inventory tracking. There are three reasons that inventory tracking is important for your home-based internet business. First, inventory tracking is necessary in order to accurately calculate your cost of goods sold and relatively, your profit margin. Second, inventory tracking will assist in ordering products for resale ensuring that you don't run out of stock. Third, inventory tracking that is integrated with an automated sales system ensures that your customers receive exceptional customer service.

1. Inventory Tracking and Cost of Goods Sold

In order for your income statement to be accurate, you simply must know your cost of good sold figure. Inventory tracking will make it easier to calculate your cost of goods sold without doing a physical inventory of your merchandise each and every month. However, if you move a lot of inventory, it is a good idea to do a physical inventory periodically, even if you don't do it monthly.

To calculate cost of good sold, you take your beginning inventory, add your inventory purchases, and deduct your ending inventory. The figure that you get will be your cost of goods sold. On your income statement, your gross revenue less your cost of good sold is your gross profit. When you divide your gross profit by your gross revenue, the result is your profit margin. Most businesses identify an ideal profit margin, generally around 40%. Fluctuations in your profit margin indicate a problem with your inventory tracking, or with the inventory itself.

2. Inventory Tracking for Managing Inventory Levels

Inventory tracking for the purpose of maintaining sufficient levels of inventory will simplify your ordering process. When you know how many of a certain item you have in stock, you will easily be able to determine how many you need to order when it comes time to place an order to replenish inventory. Inventory tracking can often be incorporated into your sales system so that your inventory levels are up-to-date all the time.

3. Inventory Tracking to Improve Customer Service

With a good inventory tracking system that is integrated with an automated sales solution, your system can tell customers right away whether or not an item they are ordering is in stock. With such a system, customers will be immediately informed of the inventory status, or backorder status of their order. This adds a special touch to your customer service program and makes customers feel better when dealing with you impersonally via the internet.

These are the three main reasons that inventory tracking is important for an online business. There are a number of inventory tracking software programs that can simplify the process of inventory tracking; although you can do it manually using a spreadsheet, or even a ledger book. However, if you want the advantage of integrating your inventory tracking system with your sales and order processing system, it is best to choose inventory tracking software that is compatible.